New financial year tax tips for property investors

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Rental properties make money for investors through income and capital gains, both of which are taxable.

Depending on your annual income from investments, wages and other sources, tax can eat up a sizable chunk of your returns.

One way to minimise your tax bill is to ensure you’re claiming all of the deductions you can on your investment property.

Expenses you incur due to owning a rental property can be o set against the income the investment brings in.

If the deductions add up to more than the income, you can offset set the tax loss against earnings from other sources. If the income is higher than the total value of deductions, you must pay tax on the excess. 

Most of the income you’ll receive from your investment property will be rent paid by tenants. Other property-related income is also taxable, such as insurance payouts for damage to the property or lost rent, and rental bond you’ve retained to pay for damage caused by tenants.

The Australian Taxation Office has strict rules about what costs and expenses you can and can’t use to reduce your tax bill. For example, you can only claim expenses for the period that your property was rented or available for rent.

You can claim some expenses in full in the tax year in which you incurred them but others must be claimed over a number of years.

CLAIM IN FULL NOW

The long list of expenses you can claim straight away includes:

• Interest on your mortgage

• Strata fees

• Council rates

• Water bills

• Repairs and maintenance

• Pest control

• Property management costs

• Advertising for tenants

• Land tax

• Legal expenses

• Bank charges

• Administration costs such as phone bills, stationery and postage.

You can claim a tax deduction this year on expenses you’ve prepaid such as insurance and interest on your mortgage for the coming nancial year.

CLAIM OVER TIME

Some costs must be claimed over several years. Charges for establishing a mortgage are usually claimed over five years, for instance. Assets that wear out and need to be replaced periodically – such as carpets and hot water systems – need to be depreciated with the cost claimed over their useful lifespan. 

You may also be able to claim capital works deductions, which cover the property’s construction costs, including the home itself, carports, sealed driveways and fences, and items that are fixed in the building such as kitchen and bathroom cabinets.

DON’T CLAIM AS EXPENSES

You can’t claim the cost of buying and selling the property or any initial repairs that are needed before you can rent it out. These costs are factored into the profit, or capital gain, you make when you sell.

These lists are not exhaustive. If in doubt, check with a tax professional.