Investment Property Tax Deductions: What Can I Claim on Tax?

Unless you are leasing your property through a private engagement, it’s likely that you’ll have to do some form of advertising to attract prospective tenants. Thankfully, you can make an immediate deduction for any expenses related to advertising your property for lease. 

Most of these tax deductions cannot be claimed unless you are making rental income, so you’ll want to avoid extended periods of vacancy. 

Generally, depending on the location and condition of your property, finding a tenant can take anywhere between 1-6 weeks and tends to cost somewhere in the range of $100-600. 

Unless you already work in the financial or legal sector, it’s likely that you’ll end up paying out of pocket for these services when it comes to rental property. 

Whether you end up consulting a financial advisor about your tax return at the end of the financial year, or you have to take a tenant to court over unpaid rent, the fees paid for these services would both be eligible for a tax exemption. 

Capital gains tax (CGT) is not necessarily a tax deductible expense, but it’s worth mentioning as it can potentially save you tens of thousands of dollars when paired with proper negative gearing strategies. 

The capital gains tax is the dutiable amount you incur from selling any large asset such as a business, property or shares. CGT is calculated by subtracting all expenses (including purchase price) from the sale value of the asset. This means that 100% of the profit made on the asset is added to your taxable income. 

CGT can be especially costly when it comes to property sales, as many houses will generate a profit of more than $100,000. However, if you have held on to the property for upwards of 12 months you will be eligible for a 50% discount on CGT, with only half of the profit contributing to your taxable income. 

This is why negative gearing and capital gains tax often go hand-in-hand. By leveraging the benefits of negative gearing, investors are able to hold on to their property for longer. More specifically, they can minimise the initial costs through negative gearing while the property valuation continues to grow over time. 

You can claim depreciation as a tax exemption for both the building itself, as well as any appliances that are provided to tenants throughout their lease.

According to ATO guidelines, as long as your rental property was constructed after 16 September 1987, you will be eligible for a 2.5% depreciation deduction on the original construction cost for up to 40 years. 

Moreover, you may still be able to claim depreciation expenses even if the property does not meet the above requirements if the property was extended or renovated after 16 September 1987. In this instance, you will still be able to claim depreciation deductions for the cost of the renovation or expansion.   

Unbeknownst to many, certain appliances made available to tenants throughout the lease, such as dryers, stoves, ovens, floorboards, carpets, etc. are also eligible for depreciation exemptions. However, the amount you can claim will depend on the “effective life” of the appliance and are at the discretion of commissioners. 

Depreciation is one of the most valuable deductions that can be claimed as an investment property tax benefit, so it’s definitely worthwhile getting a tax depreciation schedule (also tax deductible) for your assets to see exactly how much you can save.

Any costs paid out of pocket for insurance can be deducted from your assessable income. This includes costs of insuring the property itself, as well as costs associated with landlord insurance. 

Many investors are often initially reluctant to get landlord insurance if they already have home insurance, but it’s important to note that landlord insurance covers you for a variety of different situations that home and contents don’t cover you for, such as:

• theft, vandalism, and malicious damage by tenants or guests
• up to $20 million legal liability for death or injury to other people, or loss or damage to their property
• loss of rent if the tenant defaults on the lease agreement
• legal costs to recoup unpaid rent.

As most homeowners may already be aware, you are able to claim interest charged on your mortgage as a tax-deductible expense.

You can claim tax breaks for all of your interest repayments, as long as the loan was not used for private purposes. You will not, however, be able to claim deductions for any principal repayments.

Although this may seem restricting you can think of it this way – over the course of your mortgage you will likely pay upwards of $20,000 in interest repayments per year. You can subtract all of it, as well as any additional loan fees from your taxable income.

This is why many savvy investors opt for an interest-only loan, as they can look to maximise their mortgage tax benefits for a handful of years while they lease and sell for a healthy profit, or refinance to a more appropriate loan later down the line.

Negative gearing may seem highly complex at first glance, but it’s simple if you think of it as a way of subtracting your losses from your overall taxable income. 

Whether or not you are eligible for negative gearing tax breaks will depend on how much cash flow your investment property is bringing in. So if your overall expenses (loan repayments, maintenance, council rates, etc.) amount to more than the rental income you get from your property, you will be able to deduct the negative difference from your assessable income. 

Understanding the benefits of negative gearing is crucial to minimising initial expenses so that you are able to sell for a larger profit at some point in the future. As mentioned above, you can leverage negative gearing to ensure that capital gains tax doesn’t leave a gaping hole in your profits. 

Both rental property owners and tenants can claim pest control on tax, depending on who covered the costs for the service. As long as the cost is within reason, you can generally claim it as an immediate deduction.

Although pest control deductions may not be as substantial as others on this list, it’s worth a mention, as it’s quite often overlooked by many property investors come tax time. 

You are eligible to claim immediate deductions on any repair or maintenance work carried out to preserve the condition of the property. According to criteria provided by the ATO, improvements are also eligible as long as they are not substantial improvements (renovations) and were not carried out immediately after the purchase of the property.

Keep in mind that you must claim significant renovations as capital works deductions (depreciation deductions) over a 40-year period rather than an immediate deduction.

Some examples of improvement, maintenance and repair costs that you may be able to claim include:

• Conditioning gutters
• Garden upkeep and maintenance
• Painting the inside and outside of the house to maintain condition and appearance
• Plumbing work carried out to repair clogged drains, leaky pipes, toilets, etc.
• Repairing or replacing tiles, wallpaper, carpets, etc. due to tenant damage or wear and tear
• Repairing broken fencing
• Replacing roof tiles or awnings after severe weather conditions
• Repairing necessary appliances or machinery

Council rates

Local governments usually charge homeowners within the district an annual council rate that helps fund infrastructure, services and public amenities within the local area.

These fees will differ greatly on your location, but all of it can be written off as a tax deduction as long as the property is being rented out.

Land tax

Any properties that generate taxable income are eligible for land tax concessions.

However, it’s important to note that each state and territory applies its own regulations when it comes to land tax deductions. So just make sure to check with the appropriate state government department or seek professional advice to ensure that you are claiming back as much as possible.

Strata fees

Any homeowners residing on a strata will know that body corporate fees can soon start to add up out of the blue.

As we previously mentioned with council rates, any strata fees are also immediately deductible from tax as long the property is being rented out during the same period.

As long as you provide the necessary evidence that they are needed for the management of your property, any stationary, phone or internet expenses can be claimed as an immediate deduction.