Firstly this is general information and it is recommended you speak with your own accountant or financial advisor regarding your own individual circumstances.
If you own an investment property, you will have tax obligations and entitlements. Some of these benefits will occur in the short-term whilst others will be on the long-term perspective. There are many tax benefits to owning investment properties and understanding what you can and can’t claim may seem complicated at first, but if you are “tax savvy” it will certainly make is a lot easier when tax time comes around.
How to be tax savvy
If your investment property has earnt income during the financial year, you will need to:
Key tax benefits from investing in property
Now to get down to the nitty gritty. There is a myriad of expenses you can actually claim on your tax return. The Australian Taxation Office always release an annual tax guide for property owners that lists out the most common expenses to claim.
Also keep in mind, if you decide to engage the services of a tax agent to complete your return- this is also a deductible expense!
Property and Negative Gearing
Gearing can be used to reduce tax payable on an investment property. The type of gearing is determined by whether the costs for your income generating asset (i.e., your property) is more or less than the income earned.
Negative gearing
Negative gearing is when the costs of owning an investment property are higher than the income that is made on the investment property.
Positive gearing
Positive gearing is achieved when the income generated from rent exceeds the costs of owning the property. This means that after all expenses on the property, including the outcome of your tax return, you are taking home income and this is great for someone who wants to grow an investment portfolio as it assists with your serviceability (the amount you can borrow), as lenders look favourably upon positively geared assets.
Depreciation
One of the benefits of owning property is being able to claim depreciation on the property when it comes to tax time. This benefit is quite valuable because it is a ‘non-cash’ deduction to your tax return (reduces the amount of tax you need to pay), but it doesn’t cost you any money, like other deduction that are expenses are things that you have paid for. Essentially, depreciation is the decline in value of an asset. For example, a new kitchen benchtop may have cost you around $10,000 when it was installed brand new, but in a years’ time when it will be one year older, have had some general wear and tear, it would no longer be worth $10,000. It might now be more likely worth $9,000. This decline in value of the asset over time of $1,000 is referred to as depreciation and can be claimed as a deduction on your tax return. This is a huge benefit for investment properties, because this sort of thing cannot be claimed if your property is a primary residence.
Can all investment properties claim depreciation?
No, not all investment properties are treated equally. This is due to the changes in taxation law. What you can claim is dependent on when the property was built. There are four categories:
- Properties built before 18 July 1985. You can only claim the plant and equipment in your investment property.
- Properties built between 18 July 1985 and 26 February 1992. You will be allowed to claim both ‘Capital Works’ and ‘Plant and equipment’. The typical rates of deduction claimable per year are between 2.5% and 4%.
- Renovated properties. If your property was built after February 1985, you will be able to claim depreciation on the renovation of the property even if it was the previous owner who completed the renovation.
- Brand new properties or substantially renovated.
You can claim a deduction for the depreciation of capital works and plant and equipment in the property.
What if you have co-ownership on an investment property?
When an investment property is owned jointly, the rental income and expenses from the property must be divided among the co-owners according to their legal interest in the property. This is despite any written or oral agreement between the co-owners stating otherwise (for example, even if you’ve agreed that one owner can claim 100% for tax purposes, you cannot do this and must only claim your portion of ownership interest in the property).
Record keeping
When buying a property, you should keep records of:
Records to keep when you own an investment property.
– Statement of income (proof of earned rental income).
– Receipts or bank statements of expenses
– details of private use
– loan documents if you refinance
– costs paid to rent the property
– capital improvements
– depreciation reports
Records to keep when selling.
– Contract of sale
– conveyancing documents
– selling expenses (Agents fees and costs, etc).
– Calculation of capital gain or loss.
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Disclaimer:
Aus Property Professionals Pty Ltd retains the copyright in relation to all the information contained on its website and in this guide. This guide, and any content provided in addition, or linked to resources, is general information only and not investment advice. As everyone’s individual situation is different, we advise individuals to always seek advice from relevant professionals such as legal, financial, accounting, and investing experts.
The intention of this guide is to be used for general information purposes only, in addition to your personal research and due diligence. We do not take any responsibility for any actions taken as a result of this guide as any actions should always be taken with consultation with relevant professionals who take individual circumstances to account.
Past performance doesn’t guarantee future results.
We have compiled the information contained in this guide from online resources, our research, and consultations, and we cannot guarantee the complete accuracy of this information, and we will always reference the resources where the data and information was derived.
