Investment Property Tax Deductions

If you've just bought an investment property or are looking to buy one, you need to understand the tax consequences, including which deductions you can claim. Here is H&R Block's simple guide to how investment properties affect your tax return.

1.1 Rent

• The income received is taxable to the owners of the property in the same proportion as the ownership interest as shown on the title.
• The rent received must be at normal market rates to be able to claim all the expenses in full. If you rent at below market rent (to family or friends perhaps), you can only claim deductions up to the amount of rent charged.
• The rent must be declared in the year it is received.

1.2 Interest Claims

• Interest paid on the loan used to purchase the property is deductible, provided that all the money borrowed was used to purchase the property.
• For accounts that are a line of credit and used privately as well, the interest claim needs to be apportioned for the private expenses.

1.3 Tax Deductions

• Repairs

Repairs made to the property during the period it is leased are deductible but generally not repairs carried out within the initial 12 months of owning the property (these can be used to reduce a capital gain on disposal).

• Improvements

Improvements you make to the property are not deductible in full. They need to be depreciated and claimed over their effective life.

• Other expenses can include
  • advertising for tenants
  • bank charges
  • body corporate fees
  • cleaning
  • council rates
  • electricity and gas
  • gardening
  • lawn mowing
  • in-house audio/video service charges
  • insurance
  • land tax
  • legal expenses re leases etc.
  • lease costs
  • pest control
  • mortgage discharge expenses
  • property agent's fees
  • quantity surveyor's fees
  • security
  • stationery
  • postage
  • telephone
  • water charges
  • lenders mortgage insurance (usually written off over the shorter of the term of the loan or 5 years)

1.4 Building cost write off

If the building is under 25 years old you will be entitled to claim a deduction of 2.5% per year of the original cost of construction of the building for up to 40 years from the original date of construction.

If you do not know the building cost you can contract a quantity surveyor to determine the building costs and prepare the depreciation schedules for the property and determine what can be claimed.

The service we recommend is BMT Tax Depreciation and their fee is discounted to $705 for H&R Block clients. The fee is tax deductible. Please ask your Tax Consultant for contact information.

NOTE: A deduction cannot be claimed for the costs of acquiring or disposing of the rental property, except in the ACT where properties are leasehold and stamp duty and legal expenses are allowable. Examples of expenses of this kind include the purchase cost of the property, conveyancing costs, advertising expenses, building inspection reports, travel to view property prior to purchase and stamp duty on the transfer of the property. However these costs may form part of the cost base of the property for capital gains tax purposes.

We have a record card for property investors which you may find handy. Ask at one of our offices for a free copy.

Use one of our Taxsaver envelopes to keep all your receipts and documents for the year. Remember - if you are not sure if you can claim an expense, keep the receipt and we will ensure that we claim all allowable deductions and rebates for you whilst preparing your tax return.

This information sheet is intended as a guide for H&R Block clients. All actual detail and circumstances differ, please discuss your situation with an H&R Block Tax Consultant. Use one of our Taxsaver envelopes to keep all your receipts and documents for the year. Remember – if you are not sure if you can claim an expense, keep the receipt and we will ensure that we claim all allowable deductions and rebates for you whilst preparing your tax return. H&R Block is Australia's largest network of tax accountants with over 440 offices. Every year we help thousands of Australians achieve a better taxation result. For your nearest office call 13 23 25.