Maximising Your Property Investment Tax Benefits

Paying taxes can be a bit disheartening since it impacts your profits and diminishes the overall returns from your investment property. Thankfully, the Australian Tax Office (ATO) offers several property investment tax benefits and deductions that can help lighten the tax load on your rental income. It just all lies in maximising these rental property tax deductions. Do not fret because that’s what we’ll exactly tackle today. 

Read on to learn how to lessen the financial impact of income tax on your investment or rental property and hold more onto your hard-earned profits. 

How Does Rental Property Tax Work in Australia?

Rental property tax in Australia operates on a relatively straightforward principle: you’re required to declare all income you receive from your investment property, but you’re also entitled to claim deductions for expenses related to earning that income. Here’s a breakdown of how it works:

Income Declaration

You must report all rental income you receive in your annual tax return. This includes the rent and any additional payments you might receive from your tenants, such as bond money you retain for property damages or booking fees when holiday renters cancel a booking. Have you received a relief fund or insurance payout after a natural disaster or unexpected event such as burst pipes? You should also report that income. 

Expense Deductions

You can claim deductions for expenses incurred in earning rental income. Expenses on maintenance, council rates, and interest on loans can be claimed during the income year you incurred the expense. You can also claim deductions for expenses incurred over several years, including capital works & depreciating assets over $300. Overall, these deductions reduce your taxable income, effectively lowering your tax bill.

Net Rental Income & Tax Rate Application

Your taxable rental income is calculated by subtracting your allowable deductions from your gross rental income. The net rental income is then added to your other sources of income, and tax is calculated based on your total taxable income for the year.

Just a Note 

Claiming a tax deduction doesn’t mean you get the full amount back from the Australian Taxation Office (ATO). Instead, it reduces your taxable income. For example, if you spend $4,680 a year on cleaning fees for your rental property and your taxable income is $90,000, you’ll pay tax on $85,320 ($90,000 – $4,680). This reduction in taxable income can lead to significant savings on your tax bill.

What Are Rental Property Expenses You Can Claim?

Are investment property taxes deductible? Yes. As a property investor, you can claim an array of expenses as tax deductions. Here are some of them:

• Rental Expenses: These include everything you spend to earn your rental income. We’re talking about advertising costs, rental agent fees, council rates, utilities, insurance premiums, pest control, cleaning & gardening services, body corporate fees and phone and internet expenses related to property management.
• Interest on Loans: The interest paid on your investment property loan is one of the many property investment tax benefits you should maximise. This includes interest on mortgages and any other loans taken out specifically for purchasing, upgrading or improving the property.
• Repairs and Maintenance: You can claim deductions for repairs and maintenance work related to keeping the rental property in good condition. These cover expenses related to fixing leaks, repainting, or replacing broken fixtures. Just a reminder: distinguish between repairs and improvements when keeping records, as improvements are treated differently for tax purposes.
• Depreciation: It refers to the decline in the property value itself and the fixtures and fittings within it. You’ll need a depreciation schedule prepared by a qualified quantity surveyor to claim depreciating assets.
• Professional Fees: Costs for property management, tax advice, accounting services, and legal expenses related to your investment property are generally tax-deductible. Be sure to keep good records of these fees. 

What Are the Tax Benefits When Selling a Property in Australia?

Thinking of selling your rental property? Or are you just in the business of buying and selling a property shortly after improving it? When it comes to selling an investment property, here are several tax considerations and potential benefits you must know:

• Capital Gains Tax (CGT) Discount: If you’ve held the property for more than 12 months, you may be eligible for a 50% discount on the capital gain. You may only need to pay tax on half of the profit you’ve made from the sale.
• Main Residence Exemption: Was the property your main residence for any period before selling it? You might claim a partial CGT exemption. The exemption is calculated based on the proportion of time the property was your primary residence. 
• Cost Base Adjustments: You can include certain costs in the property’s cost base, which reduces your capital gain. These might include stamp duty, legal fees, and the cost of improvements.
• CGT Rollover Relief: In some cases, you might defer paying CGT by reinvesting the proceeds from the sale into another property.
• Small Business CGT Concessions: If the property was used in a small business, you might be eligible for additional CGT concessions.

Tips on How to Maximise Property Investment Tax Benefits 

1. Keep Meticulous Records: Maintain detailed records of all income and expenses related to your investment property. Be organised and keep everything from receipts & invoices to bank statements and loan documents.
2. Understand the Difference Between Repairs and Improvements: Repairs are immediately deductible, while improvements are depreciated over time. Knowing the difference can help you claim tax deductions correctly.
3. Get a Depreciation Schedule: A professional quantity surveyor can provide a comprehensive depreciation schedule. That document and their expertise on the matter can help you maximise your depreciation claims.
4. Consider Prepaying Expenses: In some cases, prepaying expenses like insurance or interest can allow you to bring forward deductions into the current financial year.
5. Know When to Sell: Consider the timing carefully if you plan to sell. Holding the property for at least 12 months can make you eligible for the CGT discount.
6. Seek Professional Advice: Tax laws can be complicated and change frequently. Speak to a tax professional or financial advisor specialising in property investment to maximise your investment property tax benefits in Australia while complying with all relevant regulations.
7. Stay Informed: Keep up-to-date with updates in tax laws and property market trends. This knowledge can help you make informed decisions about your investment strategy.
8. Consider Negative Gearing: While it shouldn’t be the sole reason for investing, understanding how negative gearing works can help you manage your tax position effectively. Discuss this with your tax advisor to get the best results. 
9. Maximise Deductions Before Selling: Ensure you’ve claimed all possible deductions during your ownership period before selling your investment property. That’s one of the understated ways to maximise tax benefits. 
10. Plan for Capital Gains Tax: If you’re selling at a profit, plan for the CGT implications. Consider strategies to minimise your tax liability, such as timing the sale or using CGT concessions.

Every Investor’s Situation is Unique

Every property investor’s situation is unique, so it’s always wise to seek personalised property investment tax advice from a qualified professional. That way, you can make the most of your investment while staying compliant with Australian tax laws. 

Need more property investment advice? Check out our blog. If you need assistance financing your investment properties, don’t hesitate to call our mortgage brokers.