If you own a property and earn rental income from it, you have an investment property.
As an investment property owner, you need to include your income and expenses of the property on your tax return.
But many investors miss out on minimising their tax on their rental property because they don’t know what they’re entitled to claim.
Rental Property Deductions
As per ATO guidelines, you can claim the following expenses on your rental property:
- advertising for tenants
- body corporate fees and charges
- council rates
- water charges
- land tax
- cleaning
- gardening and lawn mowing
- pest control
- insurance (building, contents, public liability)
- interest expenses
- pre-paid expenses
- property agent’s fees and commission
- repairs and maintenance
- some legal expenses.
You claim claim almost every expense related to the property that is incurred while your property is being rented out or available for rent.
Depreciation of the Building and Fittings/Fixtures
Under Division 43, you can claim depreciation on the cost of the building. The total cost of the building is to be depreciation over a period of 40 years using the prime cost method. This amounts to 2.5% of the building cost to be written off each year.
Even if you didn’t own the property from its first year, you can still claim Div 43 depreciation up until the building is 40 years old.
To do so, it is best to talk to a quantity surveyor. A quantity surveyor will prepare a tax depreciation report for your property, and will explain to you exactly how much you can claim as a deduction each year. The cost of the report is also deductible in your tax return in the year you incurred the cost.
Depreciation of Fittings and fixtures is similar. Under division 40, items such as carpets, blinds, air conditioners, ovens and so on. These are typically depreciated at a rate of 20% diminishing value over 10 years.
You don’t need a quantity surveyor to calculate depreciation on any new fittings and fixtures, or improvements to the building. As long as you know the exact cost of these items, your tax agent will be able to calculate the amount of depreciation each year.
Negative Gearing
The term “negative gearing” simply refers to a situation when a property’s expenses are higher than its income. When your property runs at a loss, it is negatively geared.
The loss your property makes will reduce your taxable income.
For example:
Property Income: $25,000
Expenses: $30,000
Loss: $5,000
Your taxable income will be decreased by $5,000. This will therefore lower the amount of tax you will be liable to pay. This is a tax benefit, but the fact remains: you’re losing money.
Positively Geared
When your property makes a profit (i.e its income is greater than its expenses), then your property is said to be positively geared.
While you pay tax on this income, you’re still ahead, precisely because you’ve made money.
Compliance
There are many rules around how to report your investment property in your tax return. Rules such as what is allowable as a deduction, the rate at which certain costs are recorded on your tax return, whether something is fully deductible or needs to be depreciated, need to be properly understood in order to stay on the ATO’s good side.
Get in touch with Simply Tax Group today to assist with your investment property tax return.