If you’re one of the 1.6 million Australians that own an investment property, there is a great deal of information to be aware of with regards to the tax implications of investment properties, especially depreciation.
Here, we step you through some of the key considerations for tax implications that may apply for your investment property.
1. Keep good records
When you purchase an investment property, it's important to start keeping records straight away. You'll need proof of your expenses from the beginning so you can claim everything you're entitled to. It’s also important to keep records of the date and costs of buying the property which will be important to work out any capital gain (or capital loss) when you come to sell the property.
2. Understand Depreciation
This is the area where investors make common mistakes. Some expenses can be claimed right away and others need to be claimed over the period of several years.
Immediate expense claims include:
- Interest on the loan
- Repairs from new damage to the property
- Maintenance of existing services and appliances
Expenses that must be claimed over several years include:
- Any damage to the property that existed at time of purchase
- Renovations and improvements
- Replacement of any fixture or appliance
Expenses that can never be claimed include:
- Interest on a loan for property not genuinely for rent
- Travel expenses to the property when it is a personal trip
- Stamp duty on property transfer
If you’ve borrowed against the equity in your investment property for a line of credit for a holiday or to purchase a new car – be aware that these purchases are not tax deductible.
3. Declare all income
As well as the rental income you receive from the property, you will also need to declare the following as income:
- Any bond money that you retain from a tenant due to defaults on rent or damage to the property requiring repairs.
- Any insurance payouts that you may receive; and
- Any other associated payments you receive as part of the normal activities which generate profit from the investment property.
4. Know your deductions
When the interest on the mortgage and other expenses are greater than the rent received, the shortfall can be used to reduce your tax bill - otherwise known as ‘negative gearing’.
Some of your expenses will be classified as deductions, reducing your taxable income, including:
- Interest costs
- Land tax
- Depreciation (see above)
- Property manager fees
- Council rates
- Maintenance costs and more.
As well as the usual criteria for selecting a potential investment property all of the relevant tax implications should be taken into account before you go ahead with the purchase. Understanding how much depreciation you will be able to claim and when is one of the factors that inexperienced investors tend to leave out of the equation. Property depreciation can be worth a lot of money in additional cash flow for the owner of the property, so it is important to ensure no deductions are missed.
Investors who purchase both new and older properties can take advantage of depreciation. In most cases newer properties will incur a greater deduction, as the investors will be able to claim the cost of the building structure for the entire 40 years of its depreciable life.
If you’d like more information about negative gearing, depreciation and investment property tax, refer to the ATO website or speak to your accountant.
If you’re in the market for an investment property, speak to one of our brokers about an investment loan.
* All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.