Maximising rental property deductions: what you can and cannot claim

This year, the Australian Taxation Office (ATO) is reminding property owners and tax agents about the specific guidelines for claiming expenses related to investment properties.

The ATO has emphasised that rental property deductions will continue to be a significant area of compliance focus.

Many individuals are not correctly separating interest expenses for personal use from those related to income generated by their investment properties, contributing to a tax gap of approximately $1.2 billion.

Additionally, there is widespread confusion about distinguishing between repairs and maintenance deductions for rental properties, specifically regarding what qualifies as an initial repair versus a capital improvement.

The ATO is focused on ensuring that property owners understand these differences to avoid misreporting on their tax returns. According to the ATO, nine out of ten tax returns from rental property owners contain errors.

It is crucial to understand exactly what deductions you are eligible for when making your depreciation claims. If you are unsure about the eligibility of an item, you can check with the ATO or seek advice from a professional accountant.

Here are some tips to help you maximise your tax deductions for your investment property.

What rental property deductions can you claim?

1. Loan interest: One of the largest tax deductions you can claim for your investment property is the interest portion (not the principal) of your loan. If you took out a loan to purchase the property, any interest charged is a deductible rental expense. Remember that if you refinance and take out a larger loan, you cannot claim the interest on the new loan amount; you can only claim the deduction on the original loan amount.
2. Depreciation: If your property was built after September 16, 1987, you can claim a tax deduction for building depreciation. Renovation costs are also deductible but must be spread over several years as a capital works deduction. Generally, you can claim 2.5 per cent of the construction cost per year for up to 40 years. This schedule is essential for property investors in Australia, as it helps to maximise tax benefits by detailing the depreciable assets within the property, including the building structure and its fixtures and fittings.
3. Advertising expenses: Any form of marketing used to advertise for tenants is a tax-deductible expense.
4. Rental agent fees: Hiring a property agent to manage your property is beneficial, and their fees, typically between 4 per cent and 8 per cent, are tax-deductible.
5. Legal expenses: Costs for legal services to prepare rental documents or obtain eviction orders are deductible.
6. Council rates: If you pay the council rates for your property, you can claim them as a deduction.
7. Utilities: Expenses for water, electricity, or gas are deductible if you pay them. Note that you cannot claim them if the tenant pays them.
8. Insurance: Insurance to protect your property and its contents is tax-deductible.
9. Repairs and maintenance: You can claim expenses for maintaining the property, but not for improvements that are considered capital works. Capital works must be depreciated and cannot be written off in the financial year. For example, fixing a broken window is deductible, but replacing the entire window is considered a capital work that is depreciable.
10. Pest control: Costs for pest control services are immediately deductible.
11. Land tax: If your property is rented out, land tax is deductible. Check state-specific regulations for accuracy and always consult with your accountant.
12. Tax advice/accountant fees: Professional fees for tax advice are deductible, helping you manage your financial responsibilities effectively.
13. Body corporate fees: If you pay body corporate fees for a unit or townhouse, these are deductible.
14. Bank charges: Fees for the loan used to purchase the property are deductible.

What you can't claim on an investment property

For investment properties, the following are not permitted as tax deductions:

1. Personal expenses: Any expenses related to personal use of the property.
2. Loan principal repayments: Payments towards the principal amount of the mortgage.
3. Purchase costs: Legal fees, conveyancing costs, and stamp duty for buying the property.
4. Selling costs: Fees and costs associated with selling the property.
5. Travel expenses: As of 2017 you can no longer claim the costs associated for travel to inspect the property.
6. Private loan interest: Interest on loans used for personal purposes, even if partially related to the property.

These exclusions ensure that only legitimate, income-generating expenses related to the property are claimed.

Understanding what you can and cannot claim as tax deductions for your investment property is crucial for ensuring compliance and maximising your tax return.

The ATO is tightening its focus on rental property deductions, so it is important to get it right.

By knowing the eligible deductions and consulting with professionals when needed, you can take full advantage of the tax benefits available for your investment property. Always keep thorough records of your expenses to support your claims and avoid any potential issues with the ATO.