7 Tax Deductions To Pay $7,000 Less Tax
There are many different tax deductions that become available when you invest in rental property. Let's take a closer look at each, and the value they can bring to your bottom line.
There are many different tax deductions that become available when you invest in rental property. Let’s take a closer look at each of them and the value they can bring to your tax return.
You can claim interest charged for loans as a tax deduction when the accounts in question are used for investment purposes. According to the Australian Taxation Office, this could include interest accrued through a mortgage on an investment property, money borrowed to buy shares, or other loans relating to investment portfolios.
For example, let’s say you have a $500,000 mortgage for a rental property, where interest is charged at 5% per annum and paid monthly over a 30 year period. Over a 12-month period, you would pay around $15,542 in interest for this loan. And that’s also a $15,542 tax deduction to offset the cost of your investment property.
2. Rental expenses
When you own rental properties, there are all kinds of expenses you can claim to offset the amount of tax you pay each financial year. Some of the most common expenses you can claim immediately include:
- Advertising for tenants
- Body corporate fees and charges
- Council rates
- Water rates
- Land taxes
- Pest control
- Property agent fees and commissions
- Property repairs and maintenance
You can also make claims for any travel you do that’s directly related to the property, such as inspections or rent collection.
Over time, these rental expenses add up to thousands and thousands of dollars, so when you claim them as tax deductions you could reduce the amount of tax you need to pay by just as much.
3. Depreciation of building
General wear and tear is inevitable for buildings, just as it is for vehicles and other assets. This process affects the financial value of items and is referred to as “depreciation”.
When it comes to investment properties, depreciation is one of the best things for your bottom line at tax time, with some seasoned investors even considering depreciation before they buy new property.
What makes depreciation so beneficial is that it is a tax deduction that comes built-in with the cost of the property, so you don’t actually have to pay for it on an ongoing basis. Instead, the depreciated value of the building is calculated and claimed on your tax return as what’s known as a “non-cash deduction”.
4. Depreciation of fittings
This tax deduction follows similar guidelines to the depreciation of building claims, but relates specifically to fittings inside an investment property. This includes things like lights, fans, power points, windows, sinks, showers, and so on, which are all subject to wear and tear – or depreciation – over time.
Qualified building surveyors can calculate the cost of depreciation on fittings and buildings, with the details then outlining how much the value of the assets decreases over time.
5. Loan costs
Interest may be the big charge people think of when it comes to loan costs, but there are a lot of other charges that quickly add up – as anyone with a mortgage or two knows!
These loan costs can often be claimed for investment properties, with tax deductions available for things like loan establishment fees, account management fees, mortgage insurance fees, mortgage registration, mortgage broker fees and stamp duty on the loan (not the property). Most of these claims are made over a five year period, as part of borrowing costs, and can add up to hundreds of dollars in tax deductions each financial year.
6. Holding costs
Holding costs generally relate to the purchasing of land before anything is built. For example, when you purchase land with plans to build on it, you will have to pay interest on land as well as interest on phases of construction. These expenses are known collectively as holding costs – or, what you have to pay to “hold onto” the property before you can get tenants in.
While holding costs are one of the biggest areas of tax-deductible expenses when it comes to investment property, people new to property investment often overlook or struggle to understand them. Instead, they may opt for already established buildings and properties – and miss out on tens of thousands of dollars in tax deductions in the process.
7. Accounting costs
While a lot of people pay accountants to manage their tax returns, not everyone realises that this service could actually help you pay less tax. As well as giving you access to professional accounting advice that may help you find more ways to reduce your tax, the actual fees and charges you pay for managing your tax affairs are claimable as tax deductions every financial year.
This includes fees for the preparation and lodgement of your tax return and activity statements, travel to obtain tax advice from a professional tax adviser, and any taxation appeals lodged on your behalf. You can also claim costs for any valuations you need to obtain for certain tax deductions, such as property surveying reports that you may need to lodge depreciation claims.
Accounting costs could be as little as $100, but will usually be a few hundred every year if you have a healthy range of assets and deductions. Being able to claim these costs not only reduces the amount of tax you pay but makes it easier to justify going to an accountant who can help you find ways to get the most out of your tax return.
All of these things are considered tax-deductible expenses when you have an investment property, and by adding them up accurately you can save money on tax and offset the actual cost of buying the property.
In fact, when you’ve added up all the expenses and factored in your tax refund, the right investment properties shouldn’t cost you more than $5 per week.
Look out for the second instalment of this two-part series where I will outline ways to make investment property affordable ($5 per week!).