Investment property tax deductions

Investing in property has long been a reliable strategy for Australians who want to build wealth. But alongside the rewards of long-term capital growth and rental income comes the juggling of numerous tax implications. The good news? The ATO has plenty of attractive tax deductions that can greatly reduce your taxable income and improve cash flow – if you know what they are and how to claim them.

While it’s always important to see a tax advisor, this handy guide will cover everything from capital works and depreciation to ongoing rental and borrowing costs. We’ll also clarify exactly when you need to pay capital gains tax, how land tax works and – perhaps most important of all – how to keep good records so you can stay on the right side of the ATO come tax time.

Why tax deductions matter for property investors

Owning an investment property means you’re liable for investment property tax on any income it makes for you. But you’re also entitled to claim tax deductions for many of the expenses that are part and parcel of owning and managing that property.

Claiming these deductions will minimise the income tax you pay on your assessable income. In cases where your investment runs at a loss – known as negative gearing – you could offset those losses against other income.

Let’s dig into some essential investment property tax deduction categories and what you can claim.

Rental income and deductible rental expenses

As a landlord, any rental income you earn must be reported in your tax return, including rent payments, bonds retained for damages, insurance payouts for lost rent, etc. But against this income, you can claim a range of rental property costs to reduce your taxable income.

Common rental property deductions

• Property management fees: Real estate agent fees, letting fees, administration costs related to finding or managing tenants, etc.
• Council rates and water charges: Both are considered standard rental property expenses.
• Insurance: Landlord, building, contents, and public liability insurance can be tax-deductible.
• Repairs and maintenance: Plumbing, electrical work, pest management, gardening and cleaning – provided the work restores the property rather than improves it.
• Loan interest: The interest charged on an investment property loan is usually your biggest deduction. Just be careful if the loan has mixed-use purposes (e.g. partly for personal use). In this case, the interest will need to be divvied up.
• Utilities: If a landlord pays for gas or electricity instead of the tenant, these bills can be claimed.
• Bank charges and accounting costs: Fees related to managing your rental income and paying investment property tax.

But here are some important caveats: repairs done immediately after purchase (to make the property rentable) are considered capital expenses. Think of them as being part of your ‘cost base’ when calculating capital gains tax (CGT), but they are not immediately deductible. Also, if you rent to family or friends at below-market rates, your deductions will be limited to the income earned.

Depreciation: claiming wear and tear over time

As your property and its fixtures age, they will start to lose value, and the ATO lets you claim this as a non-cash deduction through a tax depreciation schedule. There are two main types:

1. Capital works (Division 43): Referring to the construction costs of the building. You can claim them at the statutory rate of 2.5% or 4.0%.
2. Plant and equipment assets (Division 40): Includes easily removable things like carpets, blinds, appliances, air conditioners, etc. They can be claimed over their effective life (which will obviously depend on the type of item).

To claim depreciation, you’ll need a professionally prepared tax depreciation schedule from a quantity surveyor. More good news: the cost of this schedule is itself a tax-deductible expense.

Capital gains tax and the cost base

When you decide to sell your investment property, you might have to pay capital gains tax (CGT) on any profit you make – that is, the capital gain. Capital gains are calculated by subtracting your cost base (the purchase price plus capital expenses like stamp duty and legal fees) from the sale price.

If you’re an Australian resident for tax purposes and you’ve held the property for 12 months or more, you’ll be eligible for a CGT discount of up to 50%. However, this doesn’t mean CGT won’t apply – it just means you only pay tax on (up to) half the capital gain.

Here are a few helpful CGT tips for property investors:

• Keep good, detailed records of all capital expenses (e.g. renovations, legal fees).
• If you made a capital loss, you can carry it forward to offset future capital gains.
• You might be hampered by the CGT six-year rule if your investment was formerly your main residence.

Borrowing expenses and loan interest

Beyond the interest on your investment property loan, you can also claim a few of the following borrowing costs spread out over five years (or over the term of the loan, if it’s shorter):

• Loan application fees.
• Title search fees.
• Legal costs for securing the loan.
• Mortgage registration fees.
• Lender’s mortgage insurance (LMI).

Bear in mind that you can’t claim the principal portion of your repayments, only the interest charged. Also, redraws used for personal use can’t be included in your rental-property deductions. Consult a tax advisor on what’s relevant to you.

Land tax and what investors need to know

Land tax is a yearly tax on investment properties based on the unimproved value of land you own (excluding your principal place of residence). It’s a state-based tax, so thresholds and rates will differ across Australia. It’s a good idea to work with your solicitor or tax agent to understand the specifics.

Most states have a land tax threshold, meaning land tax only applies once your land holdings go above a certain value. In NSW, for example, the general threshold from 2024 onwards is $1,075,000. Anything above that is taxed at incremental rates.

Land tax isn’t tax-deductible against your personal income, but it can be claimed as an expense when calculating your rental-property deduction.

What you can’t claim

• Stamp duty on purchases: While this can be added to the cost base for CGT, it’s not deductible.
• Property purchase price: Contributes to the cost base only.
• Travel expenses to inspect your rental property: These were deductible in the past, but after an amendment in 2017, they are no longer allowed for individual investors.
• Private or capital expenses: Any costs unrelated to earning income (like personal-use renovations) are not deductible.

Record-keeping and documentation

To make a tax claim on rental costs or other deductions, you’ll need to hang on to your records, including things like:

• Loan statements showing interest charged.
• Receipts for repairs, maintenance, property management, etc.
• Tax-depreciation schedules and quantity-surveyor bills.
• Legal and borrowing documents relating to capital expenses.

More good news: electronic copies are generally acceptable. You’ll just need to keep them for at least five years.

Negative gearing and tax strategy

Negative gearing might sound confusing at first, but it’s simply a term used to describe when your investment property’s expenses are higher than the rental income you earn on it. In other words, it’s a net loss. Thankfully for investors, negative gearing it can be used to reduce your overall tax liability by offsetting other income sources like wages or business income.

It can be a useful strategy in the short term if you expect long-term capital growth. But just make sure your overall investment decisions aren’t based on tax benefits alone.

Struggling with the tax consequences of property investing? It’s true, they can be complex – that’s why it’s worth investing (again) in a professional tax expert.

Property tax deductions aren’t universal, as things like ownership structure, property use, purpose of the loan and even how long you’ve held the property can all have an effect on your tax obligations. When in doubt, speak with a registered tax agent or accountant to get guidance around your specific situation.