How to become the Sherlock Holmes of property investment tax deductions

You know the build-up and excitement you feel leading up to New Years Eve and the celebration you have on News Years Day?

Well, it’s same, same but different for the end of financial year (EOFY).

While the beginning of the financial year may lack the glitter, glamour and hangovers of a New Year's Eve bash, we do see a sense of reinvention as people seek to restart their financial lives.

The best advice I can give property investors this start of financial year is this to become the Sherlock Holmes of deductions and investigate all the different ways you can claim against your investment property. You don’t want to be the person paying more taxes than necessary.

 As a property investor, how confident are you in your knowledge of what to claim and how to claim?

When it comes to investment properties, there are certain factors to consider. Whether you own the property outright or have a large mortgage, rent out a portion or all of it, or even have a commercial owner-occupier asset, there are still numerous expenses you can claim.

It’s not just investors negatively gearing their investment property who enjoy the benefits of claiming deductions. Every investor has the opportunity to claim tax benefits, they just need to understand what they are.

The most commonly claimed deductions include the interest portion (excluding the principal) of mortgage repayments, repair and maintenance costs, property management fees, leasing related expenses, landlord and building insurance, water and council rates, strata fees, and any other expenses directly associated to the running and maintaining that investment.

Some costs are tax deductible in the year they are incurred, while others can be used to reduce your profit or capital gain, such as stamp duty and conveyancing fees.

It’s also important to note that when you own a rental property, all income and expenses must be accurately recorded and kept for at least five years, regardless of the amount. So, if you have claimed an expense, it is crucial to maintain a record of it, as the Australian Taxation Office (ATO) do not take kindly to “lost receipts” – so if you claim it, keep a record of it.

Depreciation claims worth the effort

Most savvy investors are pretty switched on about dos and don'ts of claiming deductions.

However, there is one area where many investors are missing out on valuable tax benefits and that’s in the form of claiming the depreciation of their property.

It’s a commonly misunderstood concept that leads to a significant portion of depreciation going unclaimed, resulting in the loss of potential deductions worth thousands of dollars.

Some investors mistakenly believe that only new properties qualify for depreciation or that the hassle of obtaining a report for an older property isn’t worth the effort.

The reality is that any property built after 16 September 1987, regardless of its condition, qualifies for depreciation. You are entitled to claim depreciation for 40 years from the date of the original cost base of the improvement. This 40-year window of claiming depreciation makes it worthwhile to explore the benefits of obtaining a tax depreciation report as soon as possible.

What about if you own an older home built before September 1987?

If the home is in original condition, you cannot claim any depreciation. However, if there have been any alterations or renovations, such as a new bathroom, kitchen, or landscaping works, you are entitled to claim depreciation on those capital work improvements, as long as they were installed after February 1992.

Whether the depreciation is a substantial or a small amount, it’s still better to claim something rather than missing out on potential deductions altogether.

To ensure your property is correctly assessed for depreciation, it is highly recommended to engage the services of a fully qualified tax depreciation specialist who is also a registered tax agent. This ensures your claims align with the guidelines provided by the ATO, leaving no deductions overlooked or underestimated.

In today’s climate of a cost-of-living crisis and rising interest rates, taking control of your finances has never been more important.

It’s also important to have open and ongoing discussions with your accountant or financial advisor, not just during tax time but well before you make any investment property purchases or decision. Their expertise will provide you with a comprehensive understanding of your financial options, benefits, and risks.

As we step into this new financial year, it's time to embrace a fresh start and sharpen our Sherlock Holmes financial investigator skills.

So, let’s raise a calculator and make a toast to the EOFY – here’s to your financial prosperity and may this be the year you become a master in claiming what you rightfully deserve.