Commonly missed investment property tax deductions

An investment property should be selected based on the likelihood of it generating strong capital growth rather than secondary benefits such as rental yield or negative gearing. However, saying that, this doesn’t mean we shouldn’t maximise the gearing benefits of your current or future investment property to save on tax! So, if you’re looking to purchase an investment property or currently have one, these are some commonly missed methods/deductions that will help you get the most from your investment property:

1. Depreciation schedules

Claiming depreciation and the associated capital works deductions is a significant taxation benefit, and one which many property investors are unaware of. Depreciation is a non-cash deduction meaning you do not need to spend any money to claim it.

As your property ages and items within it wear, they depreciate in value. The ATO allows deductions for this wear and tear. Deductions can be claimed on the building’s structure and items considered permanently fixed to the property. Further deductions can also be claimed on the plant and equipment assets contained within it.

To claim depreciation deductions, property investors need to engage a specialist Quantity Surveyor to complete a capital allowances and tax depreciation report. When completed, the report outlines the deductions available for both capital works and plant and equipment items on an income producing property and is used each financial year when preparing tax returns. The cost of obtaining this report is also tax deductible.

Click here for an update to the depreciation laws since this blog was published.

2. Prepay interest

If you anticipate your income to substantially decrease in the next financial year due to factors such as maternity leave or redundancy, prepaying your interest in the current financial year will allow you to reduce your current higher taxable income – maximising your tax savings.

3. Statement of adjustments

The purpose of the Statement of Adjustments is to calculate the exact amount the Purchaser will need to reimburse the Vendor on the day of settlement for the property’s annual costs already paid by the vendor for the remainder of the year. These expenses can include, but are not limited to council rates, water rates and body corporate fees. Many property investors are unaware of these expenses paid upon settlement and are usually missed as a rental expense within the first year when the property is acquired.

4. Borrowing expenses

The cost of establishing a loan can sometimes be quite substantial with some loan establishment fees costing in excess of $2,000. These costs are more often than not missed as it forms part of the loan proceeds and let’s face it – we’re always more interested with the interest expense rather than the menial bank charges!

5. Waiting until tax time to get a refund

Many employees don’t realise that they are entitled to vary the tax subtracted from their salary to ease the cash flow burden of investing in property (called PAYG withholding variation). This means you can enjoy the cash flow savings sooner – rather than waiting until the end of the financial year.

Of course, there are more…

The above is not an exhaustive list of investment property deductions – just a handful of the deductions I have found are commonly missed. Of course, there are many more expenses that can be claimed to help reduce the tax you pay. The ATO produce a guide each year to help investors but you really do need to use an expert.

Experts in investment property tax

We look after hundreds of property investors and help them maximise their taxation benefits. We know where the boundaries are. Therefore, if you need help, please do not hesitate to reach out to us for a complimentary discussion.