Millions of Aussies apply for home loans to buy investment properties. If you are considering investing in a property and renting it out, you might want to know its tax deductions. You might have questions like, “Can I deduct mortgage interest on an investment property?” “Can I claim maintenance expenses?” “What I can't claim on investment properties?” and so on.
Understanding what you can claim on an investment property may help you save a considerable amount of money every year. Read on to find out what you may be able to claim a deduction for as an investor.
Rental expenses
You can 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, insurance and fees & commission for property agents.
You can also 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 to thousands of dollars.
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 will qualify for a 50 per cent discount on your CGT. As there are different ways to calculate this tax, it's best to consult a tax expert.
Prepaid expenses
This is a future expense that has already been paid. The key word is future. If you pay for something in the same financial year, it won’t be considered a prepaid expense. To get a clear understanding of what you can claim under this expense, go through the Australian Taxation Office's detailed guide.
Legal expenses
You can also 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.
Interest expenses
Interest is one of the most significant tax deductions you can claim. You can either claim deduction on the total interest charged on the loan or a portion of it. You can only claim this expense if your property is rented out or genuinely available for rent in the same year you decide to claim a deduction.
While claiming deduction for the interest seems straightforward, there are a few details you should understand. For example, if you have used or are using the property for personal reasons, you aren't allowed to claim it. Also, if you've added another purchase, for example, a car, to the loan that is meant for your rental property, you can't claim a deduction on the portion of your loan meant for the car.
Furthermore, if you are wondering, “Is mortgage interest on investment property tax deductible?”, the answer is no. According to the Australian Taxation Office, you cannot claim a deduction against the mortgage as it isn't being used to produce income even though the loan is secured against your rental property.
By understanding what you can claim, you'll be in a better position to benefit from all the tax return opportunities available. To claim any of these expenses, you must have proof. So, ensure you always keep receipts, invoices, and other documents relevant to your investment property.
