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Tax Deductions in Investment property

Residential property can be a great way to prepare for retirement or diversify your investment portfolio. However, it is important to understand and claim all the tax deductions that you are eligible for in order to minimize the tax you are paying.

The Australian Tax Office (ATO) offers a variety of tax incentives for residential property investors. However, due to the complexity and nuances of tax deductions, it is important to seek professional advice and keep accurate records. While this information is not a substitute for personalized advice, it can serve as a starting point for understanding the tax deductions that are commonly available.

When claiming tax deductions for a rental property through the Australian Tax Office (ATO), it is important to understand their requirements. According to the ATO, if you rent out property, you should:

  • Keep accurate records from the beginning
  • Determine what expenses are eligible for deductions
  • work out if you need to pay tax instalments throughout the year
  • Report all rental-related income on your tax return
  • Consider the potential capital gains tax implications when selling the property.

 By understanding and following these guidelines, you can ensure that you are claiming all the deductions you are eligible for and are in compliance with ATO regulations.

Loan Interest

When it comes to loan interest, if you have borrowed money to purchase a rental property and have used the funds solely for that purpose, you may claim the interest charged on the loan as a tax deduction. However, if any part of the loan was used for personal purposes, you will not be able to claim the interest on that portion of the loan as a deduction.

Depreciation

When claiming depreciation for a rental property, there are two main components to consider: the building and plant and equipment.

Building: Depending on the construction date of the property and any renovations that were completed prior to 1992, you may be able to claim a deduction for the depreciation of the building’s structure. If the property was built prior to September 16, 1987, you cannot claim depreciation on the original construction costs. For properties built after this date, you can claim a deduction of 2.5% per year for up to 40 years. Additionally, you cannot claim depreciation deductions on renovations completed before February 27, 1992, but you can claim depreciation on structural upgrades done after this date at a rate of 2.5% for up to 40 years.

plant and equipment. This includes items such as light fixtures, carpets, curtains, appliances and air conditioning units. As these items are subject to wear and tear, they will likely need to be replaced at some point and will depreciate at different rates. As the items decline in value, you can claim them as depreciation over several years, however, only if they meet certain criteria. It is important to have a depreciation schedule done by a quantity surveyor to ensure that you are claiming the correct amount of depreciation and to avoid underestimating tax deductions or facing a tax audit.

Capital Gains Tax (CGT)

When it comes to Capital Gains Tax (CGT), if you sell a property within 12 months of purchasing it and make a profit, you will have to pay tax on 100% of that profit. However, if you hold onto the property for more than 12 months before selling, you will only have to pay CGT on 50% of the profit.

Other Expenses

As a landlord, there are many other expenses that can be claimed as tax deductions. These include costs associated with advertising the property, such as print media, brochures, signs and online platforms. Additionally, fees and commissions paid to real estate agents for finding tenants or managing the property on the landlord’s behalf are also tax deductible. It’s important to keep accurate records of all expenses and consult with a qualified accountant to ensure all deductions are made correctly in order to avoid any issues with the tax office.

It is beneficial for landlords to consult with a reputable financial advisor when managing their investment property finances, as the tax laws and regulations can be complex. By utilizing an accountant’s services, landlords can claim deductions for bookkeeping, accounting fees, and tax advice on their taxes.