What tax benefits are available to investment property owners?

Buying property is a popular long-term investment for many Australians. Historic low interest rates (1.5 per cent at time of writing) and ongoing home value increases have also made purchasing real estate more attractive than ever before.

However, delving into the investment property world can be daunting for some, particularly understanding and complying with the relevant tax legislation for additional homes.

But educating yourself on this topic means you could benefit from a number of tax deductions that make your real estate portfolio even more lucrative.

Why do deductibles matter?

Claiming all the deductibles to which you are entitled is important for many property investors due to negative gearing.

This refers to instances where your rental income is lower than the amount you must pay out in interest and other costs, such as repairs and maintenance.

In Australia, negative gearing can be used as a tax minimisation strategy because any losses associated with your property can be leveraged to lower your overall income tax bill. In other words, you will pay less tax over the short- and medium-term, while still benefiting from an asset that will likely appreciate in value over time.

What deductions can I make?

Here is a broad overview of some of the available deductions for investment property costs, although you should contact an expert for more details on your specific circumstances.

1. Immediately deductible expenses

There are a multitude of allowable expenses that you can immediately deduct in your next tax return provided you are renting out a property or it's available to let.

One of the most important is the interest on the home loan and any associated fees, as these can be considerable for those who put don't commit a sizeable deposit when purchasing property.

You can also potentially make deductions for:

• Council rates, land tax and strata fees;
• Water charges;
• Property management and advertising costs;
• Repairs and maintenance;
• Pest control and gardening;
• Various types of home insurance;
• Cleaning;
• Travel costs related to property inspections; and
• Some legal fees.

House repairs can usually be included as a deductible expense.

2. Depreciating assets

The value of certain items that you bought with your property or since it was purchased will decline over time. These depreciating assets may include carpets, freestanding furniture, stoves, blinds, curtains and hot water heaters.

The amount you can deduct and for how long depends on the cost of the asset. Items valued at $300 or less can be deducted immediately, while more expensive goods are deductible over several years based on their effective life.

3. Capital allowances

Depreciation also affects the building itself and permanent fixtures, so your property may also apply for a 'capital allowance' offset. Common examples of assets include:

• Door and window fittings;
• Garages and sheds;
• Electrical wiring;
• Plumbing and gas fittings; and
• Built-in cupboards and wardrobes.

This list is by no means exhaustive, however, so visit the Australian Taxation Office (ATO) website for a comprehensive breakdown of deductible fixtures.

The allowance is calculated at 2.5 or 4 per cent each year for eligible homes, depending on various factors, but you will need to check whether your investment property fits the relevant criteria.

4. Borrowing expenses

A number of fees, costs and loans associated with purchasing your property are also deductible. Interest on loans is immediately deductible, as are any borrowing expenses that total $100 or less.

Costs above this amount must be deducted over a five-year period or the timeframe of the loan, whichever is lower. Here is the ATO's list of borrowing expenses for which you can claim:

• Stamp duty charged on the mortgage;
• Loan establishment fees;
• Title search fees your lender charges;
• Costs (such as solicitors' fees) for preparing and filing mortgage documents;
• Mortgage broker costs;
• Fees for loan approval valuations; and
• Lenders' mortgage insurance.

If you would like to learn more about the tax benefits of investment property, please contact PI Store to discuss your needs.