How to maximise investment property tax deductions

investment property tax deductions

You must invest in residential property primarily to benefit from the power of compounding capital growth. Any tax benefits (negative gearing) are merely a positive consequence of this investment, not the reason for it. That said, of course it makes sense to maximise your taxation deductions wherever possible.

Make it easy for yourself

Maintaining accurate and complete taxation records is necessary to ensure all tax deductions are captured and treated correctly.

I encourage my clients to utilise their property managers services to make record keeping as simple as possible. This involves asking your property manager to pay for all property specific related expenses on your behalf. For example, if you receive a bill, forward it to your property manager and request they pay it. You may need to transfer some money into their trust account if there’s not enough rental income to pay for it, but that’s not a big deal. In fact, having your bills mailed/emailed directly to your property manager streamlines this approach.

The advantage of getting your property manager to pay for all expenses is that it will be recorded in the end-of-financial-year income and expense summary that they will provide you. At the end of the financial year, you just need to provide your accountant two pieces of information: (1) the rental summary and (2) a summary of interest and bank fees. This makes record keeping very simple.

Summary of most common tax deductions

The ATO publishes taxation statistics for each tax year (the most recent data is from the 2018/19 tax year). This data covers the 2.8 million investment properties that are owned by 2.2 million taxpayers. The most common tax deductions were:

Deduction expenseProportion of total deductions
Interest on loans47%
Capital works deduction8%
Council Rates7%
Property Agent fees/commission6%
Plant depreciation6%
Repairs and maintenance6%
Body Corporate Fees5%
Water charges4%
Land tax3%
Other inc. cleaning, garden, adverting, etc.5%
Source: ATO

Interest and bank fees

Interest and mortgage related fees will likely be your biggest tax deduction so it’s critical that you ensure its complete and accurate. I wrote this blog in 2020 which lists ten rules to follow to ensure you maximise your interest deductions.

Most banks provide year-end interest summaries (accessible via internet banking) which summarises the amount of interest charged in respect to each loan account. If you refinanced or restructured your loans during the year, you will need to include any interest charged in respect to loan accounts that were subsequently closed.

In addition, you will need to identify all banking fees changed during the financial year. This includes monthly account fees, any once off fees (such as variation or discharge fees) and any borrowing costs (the deduction for any upfront borrowing costs that exceed $100, such as Lenders Mortgage Insurance, must be spread over 5 years). These fees are often debited to transaction accounts (not loan accounts).

Depreciation tax deductions

There are two types of depreciation tax deductions that you can claim in respect to residential property, being (1) capital works and (2) deduction for the decline in value of plant, equipment and fittings such as air conditioners, stoves and so on. Based on the ATO statistics above, these items account for 14% of total deductions claimed, so they can be material. Any depreciation claimed (or that you were entitled to claim) will reduce a property’s cost base for CGT purposes.

Building and fixtures depreciation

Capital works deductions relate to the structure i.e. building. Typically, if your residential investment property was constructed after July 1985, you may be able to claim a capital works depreciation tax deductions. Generally, taxpayers can claim an annual deduction equal to 2.5% of the capital works value. If you do not have records which confirm the cost to construct the property, you will need to engage a quantity surveyor to prepare a depreciation report.

Depreciation of fittings

You may be able to claim a tax deduction for the decline in plant e.g. fittings.

If you purchased the investment property before 9 May 2017, you could claim a tax deduction for the decline in value of second-hand plant i.e., fittings that existed when you initially purchased the property. In this case, we advise investors to obtain a depreciation report assessing the value of these depreciable assets and the applicable rate of depreciation.

However, if you purchased the investment property after 9 May 2017, you will not be able to claim a tax deduction for any existing (second-hand) fittings. You can only claim a deduction for depreciation of new items that you instal/replace in the property.

Fittings that cost less than $300 can be expensed in the year the cost was incurred. If the item costs more than $300 but less than $1,000, the asset can be aggregated with other low-cost assets in a ‘low-cost pool’ and this total pool cost is depreciated at a flat rate of 18.75% p.a. If the asset costs more than $1,000, it must be deprecated over its useful life (refer table 3 in this ATO publication for a list of useful lives). If you complete substantial renovations/improvements to your investment property, it would be wise to obtain a depreciation report.

Tax deduction for repairs and maintenance

According to the ATO, “a repair is one that restores the efficiency of function of the asset without changing its character, in order to maintain it in its original state”. Therefore, if you are improving the asset above its original state, it will be considered a capital cost and will be treated as a depreciable asset (as discussed above). Otherwise, it will be regarded as a repair, and you can claim the full cost in the year it was incurred.

Other standard deductions

In addition to the items listed above (under sub-heading “summary of most common tax deductions”), other common tax deductions can include advertising for new tenants, cleaning, gardening, insurance, legal expenses, pest control, stationary, telephone and postage.

This checklist provides a detailed list of possible deductions.

Items you can’t claim an immediate tax deduction for

Any costs incurred in the process of purchasing an investment property and/or getting it ready to be available for let are considered capital costs and will be added to the cost base. That includes all acquisition costs including stamp duty, legal fees, advisory fees, buyers’ agent fees and any improvements (repairs) that you make to the property before a tenant occupies it.

Remember, professional taxation fees are a necessary investment expense

Whilst it’s possible to prepare your own tax return (or find the cheapest accountant to do it for you), it doesn’t mean you should.

There are two advantages of using a reputable and professional firm.

Firstly, they will ensure your tax position is optimised and make recommendations if there’s room for improvements.

Secondly, they will prepare it in a way that minimises your compliance risk. With data matching and electronic audits, it is important that the right deductions are entered into the correct items with the correct descriptions in your tax return. If not, you might inadvertently attract an audit, which is something you really want to avoid.

If you are going to invest in property, understand that professional taxation fees are a necessary cost of much this investment and of course, they are also tax deductible.