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Investment property tax deductions: What you need to know

Gain insight in to investment property tax deductions and unlock strategies for maximising your investment's financial benefits.

More and more Australians are seeking investment properties to improve their financial position. Whether you’re an experienced property investor looking to maximise your returns or a newcomer to the world of property investing, understanding tax deductions is crucial for maximising financial outcomes.

This blog will help provide you with an insight into investment property taxes and equip you with the knowledge to maximise your tax strategy.

Understanding investment property tax deductions

Types of deductible expenses for investment properties

Before you try to claim an expense, it’s important to know which expenses you can claim and which you can’t. Tax deductions for investment properties are divided into three categories:

  • Deductions you can claim now – such as interest on loans, council rates, repairs and maintenance, and depreciating assets costing $300 or less
  • Deductions you can claim over several years – such as capital works, borrowing expenses, and the decline in value of depreciating assets
  • Deductions you can’t claim – such as personal expenses and expenses arising from your personal use of the property

Keeping track of deductible expenses: Record keeping tips

Since you can’t claim a tax deduction without proof of purchase, you must keep records of all expenses you intend to claim as tax deductions. Written evidence can include:

1. A document such as an invoice or receipt

  • The name of the supplier
  • The amount of the expense
  • A description of the goods or services purchased
  • The date the expense was incurred
  • The date of the document

2. Evidence you have recorded yourself

  • For expenses of $10 each or less where the total of these expenses is $200 or less
  • Or where you have been unable to get written evidence
  • Your records should contain the same details as a document from a supplier

It’s a good idea to keep your records in chronological order so you’ll know where everything is when tax time comes around. Make sure you have an electronic backup, such as a photograph, in case you lose your paper records or they become damaged.

You need to keep these records for five years from 31 October following the end of the tax year, or five years from the date you lodged your tax return if you lodged later. If you’re in a dispute with the ATO at the end of this period, you’ll need to keep the relevant records until the dispute is resolved.

Common mistakes to avoid when claiming tax deductions

Making inaccurate claims can put you at risk of receiving penalties from the ATO. Here are some of the common pitfalls to be aware of when tax time comes around.

Claiming expenses without proper records

Claiming expenses without adequate records is a common mistake Australians make when doing their taxes. You can’t claim tax deductions based on estimates or on what you claimed last year. This is why it’s so important to keep accurate records throughout the year.

Incorrectly claiming borrowing expenses

The process for properly claiming borrowing expenses will depend on the amount involved. Deductions for borrowing expenses that are over $100 are spread over five years. If they are $100 or less, you’ll be able to claim the full amount in the same year you incurred the expense.

Inaccurate deduction claims

It can be tempting to inflate your deductions in order to get a bigger refund. However, if your deduction claims are found to be incorrect, you’ll have to repay the tax avoided plus interest.  You might also be hit with a penalty of between 25% and 95% of the tax avoided. To prevent any issues, it’s best to take care to ensure that your deduction claims are accurate.

Maximising tax benefits for investment property owners

Investment properties are a popular choice among Australians looking to grow their wealth. With the right strategies, you can significantly reduce your tax liability and maximise your investment property tax benefits.

Strategies to increase deductible expenses legally

Claiming all the deductions you’re entitled to reduces the amount of tax you have to pay. The ATO has a comprehensive list of deductions you can claim.

Once you’ve identified which deductions you can claim, you can explore strategies to optimise your investment strategy deductions. Claiming interest expenses and loan costs associated with your property is one of the best ways to maximise your deductions.

You’ll also be able to claim expenses related to loan interest, depreciation, repairs and maintenance, property management, and insurance.

How negative gearing can enhance your tax position

A negatively geared property is one which costs more to own than the income it generates. This creates a taxable loss which can be offset against other income you earn, such as your salary. The key benefit of this is that it reduces your taxable income and how much tax you have to pay.

You can calculate negative gearing using an online calculator to determine whether it would be a tax-effective strategy for your investment property.

Being mindful of CGT

As the owner of an investment property, you’ll want to keep in mind Capital Gains Tax (CGT). CGT refers to the tax payable on the net capital gain or loss made from the sale of an asset. You only pay this amount when you sell the property. Luckily, there are ways to reduce the CGT you pay.

If you’ve held the property for more than a year, you may be eligible for a 50% discount on your net capital gain, offering a significant reduction in the amount of tax you pay. Holding on to the property for at least 15 years will also help maximise the potential capital growth while deferring the CGT payment.

Don’t forget depreciation

A tax advantage of having an investment property that is often overlooked is depreciation. Depreciation refers to the gradual decrease in an asset’s value over time.  Depending on when your investment property was built and when you exchanged contracts, you may be able to claim depreciation for capital works and plant and equipment.

  • Capital works – wear and tear that occurs to the structure of the property and any fixed items like the roof, walls, doors, kitchen cupboards, bathroom tubs and toilet bowls
  • Plant/equipment – removable fixtures and fittings like carpet, blinds, air conditioners and hot water systems.

Expert advice on optimising tax benefits for your investment property

If you’re looking for personalised financial advice to help you optimise your tax strategies, book a consultation with one of our financial experts today.

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