One of the many benefits of investing in property is that you can secure tax deductions to reduce your overall tax burden. As an Australian property investor, what tax deductions are available to you? Which ones fit well with your personal goals and investment strategy?
Today we’ll explore several tax deductions that are commonly sought by real estate investors. Seek professional advice regarding which ones will work with your personal finances.
Capital Gains Tax (CGT)
According to Paul Drum, Head of Policy at CPA Australia, a capital gain is a “gain from the sale of a property where the sale proceeds are more than the property’s cost base; and a capital loss if the sale proceeds are less than the cost base.”
For property investors, the key to minimising Capital Gains Tax is to identify all of your legitimate expenses associated with the property’s cost base. These expenses could include legal fees, loan fees, stamp duty, real estate broker fees, auctioneer’s fees, and any capital spent on improvements to the property.
If the property in question was previously your primary residence, there are further concessions you may be eligible for. Additionally, it’s important to remember that you can include capital losses from the previous year on your taxes.
Rental Property Tax Deductions
There are some expenses that cannot be included in the cost base but can be included in rental property tax deductions. As you can see, it’s important to keep detailed records of all expenses related to your investment property. These records will help you to make the most of your deductions later on.
The following items may be claimed as expenses against your investment property’s income:
- Water rates
- Marketing costs for finding tenants
- Interest on your mortgage
- Travel expenses incurred for inspecting the property
- Property management fees
- Depreciation on assets such as air conditioners and clothes dryers
- Expenses incurred during vacancies
- Other holding costs
Most of these expenses are self-explanatory, but “other holding costs” deserves a bit more explanation. Holding costs include expenses that support the owning of the property. They could include costs incurred for cleaning, gardening, security monitoring, pest control, body corporate fees, or building and contents insurance premiums.
If you plan on deducting any of these expenses from your taxes, you’ll need to provide official documentation to the ATO. Keep and store receipts, bank statements, and depreciation schedules in anticipation for your tax filing each year.
Depreciating assets are generally not affixed to the building, and they don’t hold their value in the way that land or buildings hold their value. Curtains and carpets, for example, wear out and become outdated, so they’re perfect candidates for depreciation.
The cost of buying a depreciating asset is not usually tax-deductible, but that cost may be depreciated over the item’s life and claimed as a tax deduction for several years. The ATO provides suggested depreciation rates for different assets. You’ll just need to check their depreciation schedules.
According to the ATO, a property is “negatively geared” where “the deductible expenses (including interest on the loan borrowed to finance the property) exceed the income earned from the property.”
When all is accounted for, the result of negative gearing is a net rental loss, which allows you to claim a deduction for property’s full rental expenses against your rental and other income. In other words, your property’s rental loss can help to offset taxes on your salary, wages, or business income. If the other income isn’t great enough to absorb the entire loss, the remainder may be carried forward to the following tax year.
Effectively gearing your property hinges on a few circumstances. Your property needs a reliable cashflow to cover pre-tax borrowing expenses. Gearing also works best when you have a timeframe for your investment that’s at least five years. Most investors find that properties that generate a reliable, long-term income are perfect for gearing.
Before you embark on a gearing strategy for your investment property, seek financial advice so you understand the potential risks and benefits of the strategy for your particular situation. Timing can be everything with gearing, so plan carefully.
As you can see, there are several ways in which investment property owners can use tax deductions to reduce their overall tax burdens. For more information about tax deductions, or to speak with a specialist about your own unique situation, reach out to us at Full Financial Services.