Tax Deductions for Property Investors
Investing in property is a great way to build your wealth and create your legacy for the future. In order to maximise your tax benefits you need to ensure that you claim all the allowable tax deductionsfor property investors. To help you gain an understanding of what deductions you are entitled to, we have prepared this guide and deduction checklist. Be sure to print this out so you can keep these deductions in mind throughout the year as you collate the information for your tax agent to prepare your tax return. As with anything to do with tax, claiming deductions on your investment property can be a complex task. Talk to us and we’ll guide you through the maze to ensure you make the most of your investment.
Purchase of your property
Generally the costs you incur to purchase your investment property form part of the cost base for capital gains tax purposes when you sell your investment property. This means that you cannot claim a deduction against your rental income for the following costs:
• Stamp duty on the purchase;
• Legal / conveyance fees on the purchase;
• Pre purchase pest and property inspections for completed property;
• Pre handover building inspection for off the plan property;
• Travel costs to inspect the property before purchase of a completed property or handover of a house on completion of construction; and
• Buyer’s agent fees.
The purchase cost of the property itself is generally considered a capital cost and non-deductible. The one exception to this is if you obtain a Quantity Surveyor’s report from a registered Quantity Surveyor (which we recommend every property investor obtains). The Quantity Surveyor will inspect the property and split the purchase cost of the property into two components being:
The Quantity Surveyor will then provide you with the amount you can claim each year for depreciation of plant and equipment (i.e. on item A above) and write off of any building allowances (i.e. on item B above). You will not be able to claim any deduction for the balance of the purchase price.
There are some costs incurred as part of the purchase that are deductible immediately. These include:
• Cost of the Quantity Surveyor’s report; and
• Council rates, water rates or body corporate fees noted on the settlement statement you received from your solicitor.
Most people will need to borrow money to help them purchase their investment property. In doing this you are likely to incur costs such as:
• Loan application fees;
• Bank valuation fees;
• Lender’s legal fees;
• Title search fees charged by the bank;
• Lender’s mortgage insurance;
• Stamp duty on mortgage;
• Mortgage registration fees;
• Settlement processing fees;
• Bank cheque fees.
Providing these fees are tied directly to you obtaining the loan, these costs are deductible in full if they total less than $100. If they total more than $100, they are deductible over a period of five (5) years or the term of the loan if it is less than five (5) years.
For example, If the above charges add up to $5,000 and the loan is for 30 years, then you can claim a deduction for $1,000 for each full year and you would need to pro-rata in the first and last year, over a five (5) year period.
BE SURE TO NOTE:
If the borrowing costs relate to a loan that is partly for the investment property and partly personal (e.g. repay a car loan) then the borrowing costs will need to be apportioned between the two and only the amount that relates to the investment property is deductible over the appropriate period. If you refinance within five (5) years and get a loan from a new bank, the balance of the borrowing costs from the previous loan not yet claimed as a deduction can be claimed in full in the year of refinance.
For example If the loan which incurred the $5,000 costs noted above was replaced in year 3 with a new loan, you could claim as a deduction the balance of the costs of around $2,000, plus a portion of the new loan costs….
On top of all these points, there are other factors for you to look at, like Prepaid expenses, loan payments, off the plan purchases, expenses and more. To get a full list of your possible deductions and more information about how to go about claiming some of these, please fill in the the form below to get a copy of our Ebook “Tax Deductions for Property Investors” emailed to you immediately.