Property investment tax: common claims for rental properties
Please note: Whilst the following information is provided in good faith, Momentum Wealth and its affiliated entities are not accountants or financial planners. This does not constitute tax advice, and investors should seek their own independent advice in relation to all tax matters.
With the end of the financial year now upon us, it’s an important reminder for investors to re-familiarise themselves with their entitlements when it comes to property investment tax claims. This is a crucial period for investors, and one that can significantly impact the overall profit they make from their portfolio. With this in mind, here are some of the common items investors should look out for.
Repairs and maintenance
Whilst one of the more well-known property investment tax deductions, repairs and maintenance can often present a grey area for property owners when it comes to tax time. The main factor investors need to be aware of is the differentiation between repairs and capital improvements, as these items are treated differently from a tax perspective.
- Repairs: works carried out to fix damage or general deterioration of a property over time (i.e. restoring the property to its state prior to the damage).
- Maintenance: works that are carried out to prevent damage and keep the property in its original condition.
- Capital improvements: works that improve the state of a property beyond its original condition.
Repairs and maintenance are generally immediately tax deductible in the financial year the works are carried out. However, investors aren’t able to claim immediate tax deductions for works classified as capital improvements. Providing construction commenced on the property after 17 July 1985, they may be able to claim the latter as capital works deductions, which are generally spread over a period of 40 years.
Providing the investment property is being used to generate rental income, investors will be able to claim borrowing expenses associated with the property as tax deductible. This can include any costs associated with borrowing funds to purchase the asset, such as loan establishment costs, lenders’ mortgage insurance and stamp duty (if any) on the mortgage. These expenses aren’t immediately tax deductible, but can be claimed over a period of five years or over the term of the loan – whichever is shorter.
Property management fees
The majority of investors will choose to use a professional property management company when it comes to overseeing the performance of their portfolio on a day-to-day basis. If the property is used for rental purposes, any fees payable to property managers will be classified as part of their overall property expenses, and will generally be claimable come end of financial year. This is also the case for other expenses associated with running and managing the investment property, such as the costs of advertising for new tenants.
Body corporate fees and charges
If an investment property is part of a shared complex or strata scheme, investors will often be required to pay body corporate fees or strata fees to cover the costs of maintaining shared areas such as stairways, lifts, gardens and pools. These will usually form part of their deductible expenses; however, the way they are treated will depend on the nature of the fee charged. Generally speaking, fees that are used to fund the general running of the complex (Administration Fund Levies) or fees that are imposed on a regular basis (Sinking Fund Levies) will be deductible in the year in which the costs are incurred. However, special purpose funds used to carry out significant capital works within a complex (known as Special Purpose Levies) will usually be classified as capital expenses and won’t be immediately tax deductible, but may be claimable as a capital works deduction.
As a property ages over time, investors may be able to claim a deduction for the declining value of its structures and fittings, known as depreciation. Depending on factors such as the age of the rental property and the nature of its use, investors can be eligible to claim two different types of depreciation:
- Capital works deductions: This refers to the depreciation of the property itself, including structural elements such as bricks, walls and fixed wiring. The deduction is applicable to residential properties that commenced construction on or after 15th September 1987, but can also apply to structural improvements or alterations made on or after February 27th For commercial assets, capital works deductions can be claimed for properties constructed after 20th July 1982.
- Plant and equipment: Investors can also be eligible to claim deductions for the decline in value of removable fixtures and fittings in their property, including items such as carpets, furniture and appliances. The deductible amount is based on the effective life of the asset, which is set out on the ATO website. Whilst commercial property owners can claim depreciation for all eligible plant and equipment, this legislation differs for residential investment properties. As of the 2017 Federal Budget, residential property investors who acquire a property for income-producing purposes after 9th May 2017 are no longer able to claim depreciation for second-hand plant and equipment. However, they are still eligible to claim deductions if they have bought a new property or installed new plant and equipment themselves.
Investors looking to claim depreciation often choose to have a depreciation schedule drawn up by a licensed quantity surveyor. However, it’s also recommended that they keep a record of any additions or improvements made to the investment property over time to support the depreciation claim.
If the costs of owning an investment property (including outgoing expenses such as interest repayments, property management fees and maintenance costs) outweigh the rental income it generates, investors may be able to offset this loss against their taxable income for that financial year to reduce their overall tax obligations. Whilst negative gearing was brought into question in the lead up to the 2019 Federal Election due to Labor’s promise to eradicate the benefit for established properties (a promise that didn’t materialise due to the election outcome), investors are still able to claim negative gearing tax benefits regardless of whether a property is new or second-hand. Whilst negative gearing concessions can play an important role in helping investors minimise the holdings costs of their property, it’s important to note that the tax benefit not a wealth creation strategy in itself. In principle, a negatively geared is still making a loss; however, the idea is that the capital growth realised on the property over time will outweigh this.
Whilst by no means the only element of an investor’s strategy, the tax savings investors make each year can hold key implications for both their ongoing cash flow and, ultimately, their long-term investment goals. If you are unsure of your tax entitlements and want to ensure you are making the most out of your eligibilities this financial year, we recommend speaking to a professional accountant or certified tax advisor for assistance.