Tax deductions for your investment property

One of the biggest benefits of investing in property, as opposed to living in the property, are the potential tax benefits. Understanding the potential tax deductions available for your investment property may help you to maximise your returns.

From claiming interest on loans, repairs and maintenance, to negative gearing, the Australian Taxation Office (ATO) lays out a number of ways that investors may offset their taxable income. Let’s explore tax deductions that may be available to you through your investment property.

Investment property tax deductions

Interest expenses

Interest is one of the most significant tax deductions you can claim. You may be able to either claim deduction on the total interest charged on the loan or a portion of it. 

However, you can only claim this expense if your property is tenanted, or genuinely available for rent in the same year you decide to claim a deduction. Keep in mind that tax deductions may only be available for interest charges, and not your mortgage.

The ATO outlines that you can claim interest charged on the loan that you used to:

• Purchase a rental property
• Purchase a depreciating asset for the rental property (for example to purchase a new air conditioner for the rental property)
• Make repairs to the rental property (for example roof repairs due to storm damage) 
• Finance renovations on the rental property
• You can also claim interest you have prepaid for up to 12 months in advance

However you cannot claim interest charged on the loan for:

• The period you used the property for private purposes, even if it’s for a short period of time 
• The portion of the loan you use for private purposes when you originally took out the loan, or if you refinanced 
• A loan you used to buy a new home if you do not use the new home to produce income, even if you use your rental property as security for the loan 
• On the portion of the loan you redraw for private purposes, even if you are ahead in your repayments

Rental expenses

You may be able to claim deductions on repairs and maintenance for your new rental property. Some of the ordinary expenses include:

• Advertising for tenants
• Water rates
• Body corporate fees
• Cleaning
• Land tax
• Pest control
• Commission for property agents

You may also be able to claim any travel you do that's directly related to your investment property, including inspections and rent collection. Initially these expenses might seem trivial, but they can add up significantly over the life of a home loan. 

Negative gearing

A property is considered negatively geared when the costs associated with it exceed the income it generates. This leads to negative cash flow, meaning that the investment operates at a loss, ultimately reducing the investor's overall income.

To help in mitigating these losses, the ATO allows eligible property investors to offset the net loss incurred on an investment property as a deduction against other income come tax time. 

For example, an investor received $25,000 in rental income from one property but the costs to maintain the property hit $40,000 that financial year. This results in a net loss of $15,000 on the property. This net loss may be eligible for deduction against your taxable income and consequently may reduce your amount of tax payable to the ATO. 

Capital Gains Tax (CGT)

If you decide to sell your rental property within a year of owning it, you have to pay a Capital Gains Tax on the profit of its sale. However, if you own the house for more than a year and then decide to sell it, you may qualify for a 50% discount on your CGT. As there are different ways to calculate this tax, it's best to consult a tax expert before proceeding.

Legal expenses

You may also be able to claim some legal costs. Including those associated with:

• Evicting a tenant who isn't paying rent.
• Expenses related to taking action for loss of rental income
• Defending a damage claim regarding injuries suffered by a third party on your rental property.

Remember that you cannot claim legal expenses that include the solicitor's fees and other legal costs associated with resisting land resumption, and costs associated with defending your title to the property. 

By understanding what you can claim, you'll be in a better position to benefit from potential tax return opportunities available. Just keep in mind that to claim any of these expenses, you must have proof, so ensure you always keep a record of receipts, invoices, and other documents relevant to your investment property. 

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