Whether you are new to owning an investment property or are a seasoned property investor with years of experience owning rental properties, here’s a list of tax deductions in alphabetical order to ensure that you don’t miss out on anything!
Be aware that property investors can only claim deductions on their rental property during periods which the property it was tenanted or genuinely available for rent. If the expenses incurred have some proportion of personal use, they can only claim the portion of the expenses based on the usage for the rental property. For all deductions, invoices/receipts must be retained to prove these expenses in the event of a tax audit.
19 Tax Deductions on an Investment Property in Australia
Advertising: Fees paid to your real estate agent for marketing your property using online (eg. www.realestate.com.au, newspapers, brochures and property signage are tax deductible, and may be deducted in the same year that you paid for them (eg. May or June) even if the a new tenant begins renting in the next financial year (July onwards).
Bank Fees & Charges (Borrowing Expenses): Monthly loan admin fees are tax deductible as and when incurred. However, borrowing expenses or fees paid for the initial loan (eg. loan establishment fees, valuation fees, lenders mortgage insuranc,e etc.) will have to be amortised over a period of 5 years if they exceed $100.
Cleaning: Although it is the tenants’ responsibility to clean properties when prior to vacating them, occasionally, property investors may incur cleaning expenses especially when tenants default on their rent and move out without cleaning the property. In such instances, cleaning expenses are tax deductible. However, if you are cleaning the property prior to moving into the property as your principal place of residence, then the cleaning expenses may not be tax deductible.
Council Rates: For residential properties, it is the responsibility of the Landlord to pay for council rates. Some councils allow payments over 4 instalments. Council rates are deductible in the year that they are paid, so if only 3 instalments were made in that financial year, then only those 3 instalments will be deductible. The 4th instalment will be deductible in the next financial year.
Depreciation: An often over-looked deduction is depreciation, which is a ‘paper loss’. There are 2 aspects to depreciation – building depreciation at 2.5% per year over 40 years and depreciation on fixtures & fittings (eg. carpets, blinds, oven, hot water service, etc.). A good quantity surveyor will inspect the property and draw up a detailed depreciation schedule which lists all depreciable items that are usually depreciated at different rates.
Gardening: As with cleaning expenses, it is usually the tenants’ responsibilty to maintain the garden during their tenancy. Other than when tenants skip town without doing the necessary cleaning and maintenance work prior to handover, there may be occasions that additional gardening maintenance may be required, eg. when a large tree needs to be trimmed or cut down.
Insurance: Landlord insurance is another allowable deduction. It is also something that Glint Accountants recommend to safeguard our clients against situations when their tenants cause damage or accidental damage, loss of rental income should their tenants abscond and default on rent payments or the property becomes untenantable due to an insured event.
Interest: Loan interest is often the largest deductible expense for a rental property. Be aware that only the interest is deductible, not capital repayments. In the event that the loan is refinanced and a larger loan is taken out, the additional portion of the loan will only be tax deductible if it is used for investment purposes. If the additional loan has been used to finance a personal expense (eg. a boat or a caravan), then interest incurred on that portion of the loan will not be tax deductible.
You can claim the interest charged on the loan you used to:
- purchase a rental property
- purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
- make repairs to the rental property (for example, roof repairs due to storm damage)
- finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)
You can also claim interest you have pre-paid up to 12 months in advance.
Legal Expenses: Legal expenses incurred for the purchase or the sale of the property are not deductible against rental income, but form part of the cost base of the property for capital gains purposes. However, should you need to incur legal expenses to evict the tenant or take them to VCAT for unpaid rent and/or damage to the property, these will be tax deductible in the year that they are incurred.
Land Tax: If you have incurred land tax as a result of owning more than 1 property within an individual state, this is tax deductible for the rental property.
Pre-paid Expenses: Pre-paid expenses are often overlooked. They are those that provide for services extending beyond the current income year, such as payment of an insurance premium on 1 January that provides cover for the entire calendar year.
You can generally claim an immediate deduction in the current income year for:
- pre-paid expenses of less than $1,000
- expenses of $1,000 or more where the service period is 12 months or less (such as payment of an annual insurance premium part way through an income year).
A prepayment that doesn’t meet these criteria may have to be spread over two or more years.
Pest Control: If the event that pest control expenses are incurred (eg. removal of vermin or spiders), the cost of hiring a professional pest controller is tax deductible.
Property Agent’s Fees: If you have engaged the services of a property manager to collect rent and liaise with your tenant on various matters (eg. repairs and maintenance, 6-monthly inspections, etc.), they usually charge a tax deductible property management fee of between 5.5% to 8% of the monthly rent collected for their services.
Repairs & Maintenance: From time to time, something in the property will require repairs or maintenance eg. faulty heating or cooling system, plumbing repairs, etc. These are deductible in the year that you incur them if:
- the expense directly relates to wear and tear or other damage that occurred as a result of renting out property, and the property
- continues to be rented on an ongoing basis
- remains available for rent but there is a short period when the property is unoccupied – for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.
However, be aware that some repairs may not be immediately deductible and may have to be depreciated over a period of time, especially if they are improvements to the property. An improvement is anything that makes an aspect of the property better, more valuable, more desirable or changes the character of the item on which works are being carried out. For example, a timber fence is replaced with a Colorbond fence.
Stationery and Postage: This is an often forgotten deduction as it is a small amount. ATO allows deductions for stationery and postage, provided you only claim deductions directly associated with your investment property eg. for tracking rental income and expenses or mailing documents to your property manager. If it is disproportionately large compared to other landlords, it is likely to raise red flags.
Strata Levies or Body Corporate Fees: These are usually incurred when the property shares common areas with other properties, eg. units, townhouses and apartments, and fully tax deductible in the year that they are paid.
Travel Expenses: Prior to 1 July 2017, it was possible to claim a deductible for travelling to inspect your rental property or to attend to repairs & maintenance. However, this is no longer tax deductible.
Utilities: Utilities bills (eg. electricity, gas and water usage charges) are usually the responsibility of the tenant. On the rare occasion that a landlord incurs these expenses (eg. when the property is vacant and being marketed for rent), they are fully tax deductible.
Water Rates: The landlord pays for certain water rates (eg. parks charges) which is tax deductible, while the tenant pays for water usage and sewage disposal charges.
Disclaimer: This blog post has been simplified to cover the common scenarios relating to rental deductions. This should not be construed as advice from Glint Accountants. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.
Prefer to speak to someone about your investment property? Our director, Geraldine Lee, is a Fellow of CPA Australia with an investment property portfolio that includes residential and commercial properties interstate, locally and overseas. She is well-versed in the complexities of Australian taxation laws and how they apply to investment properties. Contact us at Glint Accountants to make an appointment to discuss taxes and deductions relating to your rental property, capital gains taxes, suitable structures for future property investments or even about re-financing your investment loan.