Tax and gearing

What to claim on tax for your investment property?

Plenty of rental property expenses can usually be claimed on tax. Always check with your tax adviser, but things to claim on tax include:

• Advertising for tenants,
• Your accountant’s fees
• Interest on your investment loan
• Council rates, body corporate fees, land tax and strata fees
• Repairs, maintenance, pest control, cleaning and gardening
• Insurance on your rental property
• Depreciation on the building and some fixtures and fittings

Is stamp duty tax deductible? No – but it is included as a cost of buying the property, so it can help to reduce any capital gains tax payable if you sell the place for a profit.

Investment property tax benefits

Rental properties enjoy generous tax concessions and it’s important to know the things you can claim on tax.

Seek professional tax advice

Professional tax advice tailored to your circumstances is important. It lets you know what to claim on tax without breaking Tax Office rules. The cost of having your tax return professionally prepared is tax deductible.

Always maintain good records for your investment property. This will help maximise investment property tax benefits. Keep expenses for your home separate from those relating to the rental property, and hold onto the receipts for any expenses you claim on tax. These will be needed to prove your deductions if you’re ever subject to a Tax Office audit.

How does negative gearing work?

When it comes to investing, the term 'gearing' refers to borrowing to buy an asset. Most investors use some gearing in the form of their mortgage to fund their rental property. The loan interest is often a major expense but it can be claimed as a tax deduction when the property is tenanted or available to let, and this can significantly reduce the cost of the loan. See our section on negative and positive gearing for more details.

What can I claim on tax?

You can claim a variety of property-related costs as long as the property is tenanted or available for rent. If the property is taken off the market for a period, for example, to undertake renovations, you won't be able to claim the costs that relate to this time span.

The following expenses can normally be claimed on tax:

• Advertising for tenants, property management fees
• Accounting fees
• Borrowing costs like valuation fees, loan establishment/ registration fees or LMI premium (these may need to be claimed over a period of five years)
• Interest payments and ongoing loan fees
• Stationery, phone costs, and bookkeeping fees
• Council rates, body corporate fees, land tax and strata fees
• Repairs, maintenance, pest control, cleaning and gardening
• Electricity, gas and water (part of these costs may be paid by the tenant in which case they cannot be claimed by you, the landlord)
• Insurance premiums for building, contents, public liability and landlord insurance
• Depreciation of some items including the building

Most of the above expenses are normally deductible immediately in the year they are paid. Others such as borrowing costs must be claimed over a period of years.

Is stamp duty tax deductible?

Costs associated with the purchase of your property, like legal fees and stamp duty can only be claimed when you determine any capital gain on sale of the property. Always seek tailored advice from a qualified accountant or tax agent when making a claim for rental property costs.

Capital gains tax

​Capital gains tax is based on the difference between the selling price and the purchase price, which can include the sum paid for the property plus legal fees, stamp duty, and other upfront costs as well as the value of any capital improvements (renovations) completed by you.

How is CGT calculated?

CGT only applies to properties purchased after September 1985. For properties purchased after October 1999, a discount of up to 50% may be available on the capital gain calculated for tax purposes (eligibility is dependent on the ownership structure of the investment- see your tax accountant for more information).

When it comes to calculating capital gains tax, the Tax Office will regard the date you entered the contract to buy the property as the date of purchase - not the settlement date. Check the calendar before you sell, as the discount only applies if you have owned the property for a minimum of 12 months. Capital gains tax can be complex, so be sure to get good advice from your accountant when selling your investment.

Depreciation

Depreciation is a valuable tax advantage of property investment. Unlike many of the costs relating to your rental property, which require you to spend cash to secure a deduction, depreciation can be claimed with no cash outlay.

What can you claim?

Two main types of depreciation can be claimed. The first applies to fittings and fixtures like stoves, hot water heaters, light fittings and carpets. The second relates to depreciation of the building itself. If your property was constructed between 1985 and 1987, the building cost can be depreciated by 4% annually.

Those built after 1987 can be depreciated at 2.5% each year. Have a look at www.ato.gov.au for a list of rates and effective life of depreciable items.

Depreciation is an area where it pays to get professional assistance. A quantity surveyor can inspect your rental property and draft a complete depreciation schedule that ensures you are neither missing out on depreciation deductions nor overstating your claim (which could result in tax penalties). Trying to estimate your own depreciation charge could leave you facing tax penalties if you get the figures wrong.