Are you confused by the tax implications of expenses incurred on your investment property? Keep reading, as this article will help to clear the fog.
The main premise for whether there is a tax deduction available is that the property must be rented or available for rent. If this requirement is not met, then all associated costs will just become part of the cost base (that is, be added onto the purchase cost of the property).
Throughout ownership of the property, you will incur costs at three stages: at the time of purchase, during the ownership period and at the time of disposal. Below we consider some of the most common costs applicable to each stage of ownership.
Costs on Purchase
On purchase of an investment property the most common expenses incurred are:
- Stamp duty
- Legal costs
- Buyer agent fees
- Research costs
- Borrowing costs
Stamp duty, legal costs, buyer agent fees and research costs are treated as forming part of the cost base (that is added onto the purchase price of the property) and will not be deductible against your rental income in the first year of ownership. When you eventually sell the investment property, the increased cost base will reduce any tax on the potential capital gain.
Borrowing costs on the other hand can be amortised or deducted against rental income over the lesser of either the life of the loan or five years.
In addition to borrowing costs there may also be adjustments at settlement of the property that will be treated as assessable income or deductible rental expenses for costs such as council rates, body corporate fees and water rates. These figures are normally listed on the property purchase settlement statement.
Ongoing Yearly Costs and Other Expenditure
There are a range of deductions that you may be able to deduct against any rental income you generate and these include:
- Advertising costs for tenants
- Council and water rates
- Interest expenses on any loan taken out against the property
- Land tax
- Body corporate fees
- Insurances including landlord insurance
- Repairs and maintenance in respect to the wear and tear of the property
- Pest control
- Real estate management fees
- Letting and legal fees
In addition to the above you can also claim a deduction for any capital works undertaken to improve the property (such as installing a new kitchen or bathroom) or capital allowances for any depreciable assets purchased (such as a new oven or installing solar panels). These costs are claimed as a deduction over several years.
You may also be able to claim a capital works deduction in relation to the construction costs of the building if the property was built after 17 July 1985. If you personally own the investment property you can also claim a capital allowance deduction in respect to any depreciating assets in the rental property if you acquire a brand-new home. If you do not purchase a brand-new property, then you may still be entitled to such a deduction if you acquired the property prior to 9 March 2017.
Since 1 July 2017 individuals can no longer claim travel expenses as a deduction for costs to collect rent or inspect and maintain the property.
Please note that you are no longer able to claim a deduction for travel costs incurred in relation to inspecting, maintaining or collecting rent from your investment property.
Costs on Disposal of Property
Costs you will include at the time of disposing your property include sales commissions, advertising and legal fees. These costs are not deductible against your rental income however they may help to reduce any capital gain, as they are also added onto the cost base.
In addition to costs on purchase, there may be council rates, water and body corporate fee cost adjustments at the time of settlement, on disposal of your investment property. These will need to be included in your tax return as a deduction against the rental income.
Change in Property Use
It is important to note that where you own an investment property and you decide to stop renting it out, then it is likely going to result in you being unable to claim deductions. This may also impact the treatment of any capital gain you make when you sell the property.
If you are looking to purchase or sell an investment property or have any questions in relation to the above, please contact a William Buck advisor.