One of the numerous advantages to property investing is the tax deductions that can be claimed at the end of the financial year. Fortunately for property investors, there are numerous deductions that can be claimed. These deductions are used to reduce your income and subsequently reduce your total tax paid. So, what are these tax deductions and how much money can you get back into your pocket?
Your personal income
The amount of money you get back depends on your overall income. Personal income is taxed at a percentage depending on the amount of money made over a financial year. Therefore, the amount of money returned is dependent on the number of tax deductions claimable and the individual’s personal income. This is important to note as the same level of deductions can return a different amount come tax time for different individuals.
There are numerous tax deductions that can be claimed throughout any given year. Deductions generally refer to any expense associated with the ownership, upkeep, and maintenance of a property. However, this can also include deductions on the dwelling of a property itself which indirectly occur over time. The list of potential tax deductions can be seen as follows:
- Loan interest: The interest incurred over a financial year is a major expense of owning an investment property. In fact, in most cases, it would be the largest expense for many property investors. Fortunately, all interest paid and associated bank fees of owning an investment property are deductible.
- Repairs and maintenance: With nearly all investment properties, at some stage will require some form of repair or maintenance. Particularly if the investment is an established property that was constructed many years ago. Luckily, all repairs and maintenance can be claimed as a tax deduction. This would be considered within the upkeep of a property and investors are able to reduce their overall tax burden by claiming these expenses.
- Property management fees: When renting out an investment property most investors engage a recitable property manager. They look after the property from a tenant’s side of things and collect the rent, inspect the property and manage any maintenance issues. The fees associated with engaging a property manager usually sit around just below 10% of the rental return of the property. These fees and any other administrative fees charged are also claimable for the investor. Most if not all property managers also send out an end-of-year statement to the landlord. This makes it easy to track cash flow as it includes all expenses and income over the course of a financial year.
- Council Rates: Another claimable expense is the cost of council rates. Rates vary from area to area, but the cost of rates is claimable across the country. These will typically be paid by your property manager (if you have one) and will be shown within the end-of-year statement.
- Insurance: Many investors pay annual fees for building and landlord insurance. This covers their liability in case something was to go wrong. Again these are claimable expenses that can be offset against your total tax paid.
- Strata: Some properties are strata titled (usually units) which are simply a collection of dwellings divided into lots. Owning a strata-titled property costs the investor in strata fees which go towards the maintenance and upkeep of the properties within the strata title. Strata titles usually don’t incur council rates, so this is essentially the opposing cost for the owners of these properties. Similar to council rates, this is also a claimable expense come tax time.
- Tax depreciation schedule: A tax depreciation schedule is a report which can be used at tax time to claim deductions associated with the depreciation of a property over time. This is not an expense that comes straight out of your pocket but can still be claimed. In order to claim this an investor will need to obtain a tax depreciation schedule from a certified company and forward this on to their accountant (or keep it for themselves).
- Accountant fees: This is not directly related to property but still has some correlation. Many property investors engage an accountant at tax time as the tax return of an individual with an investment property is far more complex than straightforward income. The expense cost to engage a tax accountant can also be claimed by your accountant for your following tax return.
- Advertising costs: You may have advertised your property in the last year for new tenants. The cost of advertisement which will usually be an expense to your property manager is a further tax deduction.
- Land Tax: If you own multiple investment properties or own an expensive lot of land you may be required to pay land tax each year. This cost varies from state to state, and the minimum threshold also varies. Though, this is a claimable expense that helps to mitigate the cost of building your wealth.
- Lenders Mortgage insurance: many investors endure the cost of LMI in order to purchase an investment with less than a 20% deposit. The cost of doing so can be quite expensive but allows the investor to get into the market with a smaller deposit. Fortunately, the cost of LMI can be deducted over a 5 year period from when the property is settled.
- Other: There are still numerous other tax deductions that can be claimed if incurred over the financial year. These include the likes of water bills, certain legal fees, some travel expenses, building and pest costs, gas, electricity. Though each of these is dependent on your situation and whether any of these expenses were incurred.
Things to consider
Time and time again we have discussed the importance of investing for growth or cash flow not for tax advantages. So, it is important to note that any tax deduction claimable should be the icing on the cake of an investment strategy. Fortunately, the government greater incentives property investors by providing these tax deductions. Therefore, an investor should take full advantage of any tax deduction claimable. Though, investing purely for tax deductions would likely be a disservice to the investor.
Moreover, it is important to understand that some deductions are inherently “devaluing” your assets. If you claim deductions against the dwelling of your investment you are accepting the fact the dwelling is losing value over time. I mean the definition of the deduction is to: “subtract something”. In this case, that subtraction comes from the value of the property. So, the “devaluing” of your “asset” is simply recouping the lost value you experience over time.
There are numerous tax deductions that can be claimed by the investor come tax time. Your personal income and property expenses will dictate how much you get back from your tax return. It is important to note all of the potential deductions in order to ensure you maximise your tax return potential. Note, that tax deductions are a great benefit to property investment but are the icing on the cake of a good property strategy and plan. Hopefully, this information will give greater clarification around the deductions available to property investors.