Investment property tax benefits explained: How does owning an investment property affect taxes?

Hot water systems that suddenly stop working.

Air-conditioning units and dishwashers that no longer turn on.

The bottom line is that owning an investment property can see you paying a number of bills every month.

But if you buy the right type of quality property in the right location, it can also help you grow your wealth.

And as an added incentive, the expenses involved in owning an investment property help you pay less tax.

How does owning an investment property affect taxes?

The majority of the costs associated with owning a rental property can be deducted against your regular income tax, which reduces the amount of tax you pay overall.

Let’s say you earn $80,000 a year. In total, you spend $25,000 paying for your investment property, but you receive $20,000 in rental income.

The difference ($5k) between the money you receive in rental income ($20k) and the money you spend paying for the property ($25k) is tax deductible.

That’s $5,000 worth of expenses you can claim against your regular income tax.

The ATO would assess your tax as if you’d earned $75,000 instead of $80,000.

Every week or fortnight or month, you’ll pay tax as if you earn $80,000.

But when you file your tax return, you’ll get a refund on the additional tax paid on the $5,000 difference.

According to current tax rates, that’s around $1,625 back in your pocket.

You can also generally make a decent claim each year for depreciation, which is an allowance for the wear and tear of the property over time.

Investment property tax deductions in Australia – a breakdown

So what kinds of expenses can you claim when you own an investment property?

The costs can add up pretty quickly, but the upside to shelling out for ongoing maintenance, repairs, and mortgage interest is that the list of expenses you can claim on your tax return is longer than a supermarket receipt.

Some of the specific investment property tax deductions you’re entitled to as a landlord include the following:

• The cost of placing advertisements looking for tenants.

• Bank charges, including break fees if you end a fixed loan.

• Body corporate fees and charges (not including special levies).

• Building, contents, landlords, and public liability insurance.

• Council rates.

• Consultants and professional fees related to owning your investment property, such as an accountant, quantity surveyor, or pest control expenses.

• Depreciation, relating to the wear and tear of the building and its contents (you’ll need to get a depreciation schedule prepared at a cost of around $600-$700 — this fee is tax deductible too.)

• Electricity and gas charges you pay for (in most cases, tenants pay these costs).

• Gardening expenses.

• Mortgage interest repayments (but not the principal part of the repayment).

• Property management fees, commissions, and charges.

• Professional copywriting, photography, or videography to advertise the property.

• Repairs and maintenance.

• Some legal costs and lease document preparation expenses.

• Water supply rates and charges (excluding any water usage paid by the tenants).

I’ve highlighted what you can claim on an investment property – but what about the costs that are not tax-deductible?

According to the ATO, some of the property costs you can’t claim at tax time include the following:

• Stamp duty charged by your state or territory government when you purchase the property – this is a capital expense.

• Legal expenses, including solicitors’ and conveyancers’ fees for the purchase of the property – again, this is a capital expense.

• Renovation expenses. Repairs are allowable deductions, while renovations are capital expenses. Think of it this way: repairing one broken kitchen cabinet is tax-deductible. Replacing all of the kitchen cabinets with new ones is not.

• Borrowing expenses on any part of the loan you use for private purposes. For instance, if you refinance your investment property loan and use $20k of your equity to renovate your own personal kitchen, the interest on that loan is not tax-deductible. This can be really tricky to manage and track, so it’s a good idea to keep your private and investment-related loans separate wherever possible!

Source: Investment property tax benefits explained: How does owning an investment property affect taxes? (propertyupdate.com.au)