The end of the financial year is fast approaching, so now is the time to start getting your paperwork together for your tax return.
We take a look at some of the most common landlord tax deductions, as well as which property-related things you can’t claim for.
What can landlords claim?
If you own an investment property that is rented out (or available for rent), you may be able to claim tax deductions for expenses related to that property. Examples of costs you may be able to claim include:
- The costs involved in getting your property rented out, such as advertising for new tenants and property managers fees and commission.
- The day-to-day costs of running a rental property, including body corporate fees, council and water rates, land tax, gardening and lawn mowing, pest control, cleaning, and insurance. Insurance may include building, contents, landlord, public liability and/or income protection insurance.
- The cost of maintenance and repairs, but only if the work relates to wear and tear or damage that occurred as a result of renting out the property.
- Interest costs. If you took out a loan to purchase your investment property, you may be able to claim the interest charged on the loan (or a portion of it) as a deduction.
- Certain legal costs. If you incur legal costs as the result of evicting a tenant, taking court action for loss of rental income or defending a damages claim relating to injuries sustained by a third party on your investment property, you might be able to claim them as a tax deduction.
- Pre-paid costs for services that extend beyond the current financial year may be able to be claimed as an immediate deduction. For example, an insurance premium that provides cover for 12 months and extending beyond the end of this financial year, may be claimable. Any pre-paid costs greater than $1000 paid for services that extend for more than 12 months may have to be spread across two or more years’ worth of tax returns.
What about depreciation?
Depreciation refers to the decline in value over time of an asset with a limited life, like a washing machine for example. When it comes to investment properties, there are two types of depreciation – building allowance, and plant and equipment. Building allowance relates to the building structure, while plant and equipment refer to removable assets within the building itself such as carpets, curtains and appliances. Properties built after July 1985 can claim both types of depreciation, while older properties can only claim plant and equipment. A tax depreciation schedule drawn up by a quantity surveyor is the best way to maximise your depreciation tax deductions. Depreciation can be one of the best tax breaks available to property investors, so it is worth doing properly.
How does negative gearing affect tax?
If the cost of owning your investment property, including loan repayments and other costs associated with property ownership, is greater than the rental income you earn from the property, then your rental property can be described as negatively geared.
You may then be able to claim the full amount of expenses associated with your investment property against your other taxable income, such as your salary, to reduce your overall taxable income. Whilst this might be useful at tax time if your property is negatively geared it means that you are making a loss. In that situation, you want your property to gain in value over time so that you get more in capital gains when it comes time to sell than you have spent in expenses.
What can’t landlords claim for?
- Any expenses paid for by someone else, for example, the water or electricity charges if your tenant paid them.
- The cost of buying or selling your investment property, including the purchase cost, conveyancer or solicitor’s fees, advertising costs and stamp duty.
- GST credits for anything you buy to rent out your property, because GST doesn’t apply to residential investment properties. Instead, you may be able to claim the total cost of the item in question, inclusive of GST.
This is general information, and we recommend that you seek professional taxation advice relevant to your circumstances.
Have a question about landlord tax deductions? Get in touch with our experienced property management team today.