For many Australians, their personal home is their biggest investment. Once they have purchased a home to live in, their next biggest purchase would be an investment property. If you are in the market for an investment property, then you should do your homework before you buy. There are many things that you should consider overall, before signing a contract. The extent that negative gearing will impact on your overall tax position is usually the key consideration, along with the timeframe for your investment and capital growth possibilities.
If you are mainly concerned with saving tax, then certain properties may give you better tax deductions over others – depending on their year of construction or renovation, and the effective life left in the fixtures and fittings.
New properties usually provide the greatest tax deductions whereas their capital growth is usually delayed for a number of years. On the other hand, older properties in good areas may have lower tax deductible expenses associated with them, but their capital growth may be better in the long run.
If you are just considering tax deductions in isolation, then you would typically be able to claim the following expenses:
- Council Rates
- Urban utilities – you may pass the water component on to the tenant, as discussed
- Body corporate fees
- Building insurance
- Landlord insurance
- Borrowing expenses – you can claim (over a period of 5 years) all of the costs associated with obtaining the finance for your rental property, including:
- Loan application fees
- Mortgage insurance
- Mortgage registration fees
- Title search fees
(These fees will be detailed in your initial loan statement)
- Interest expenses relating to the borrowing used to purchase the investment property.
- Loan account fees charged on your loan.
- Repairs and maintenance – other than initial repairs, incurred shortly after settlement, which would be capital costs (added to the initial cost base of the property).
- Tax depreciation – you may be able to depreciate some of the fixed items such as ovens, fans, and air conditioning. However you will probably need to discuss the costs/benefits of doing this with a tax depreciation specialist. The cost of the report may outweigh the benefit depending on the age of the property. It would be wise to contact an organisation that prepares these types of schedules in relation to your prospective property purchase, in order to assess the depreciation benefits.
- Management costs – if you are employing a real estate property manager.
It is important to note that the rental expenses will be deductible from the date that the property is first made available for rent. It may then sit vacant for a period of time – before it is actually rented and you earn some rental income. Regardless of the actual date the tenant has moved in, we will deduct the costs incurred from the time it is advertised for rent.
Typically, many Australians turn to investment properties as a way of saving them tax dollars. Most property investors rely on an annual cash injection by way of their tax refund. Maximising the deductions that you can claim on your investment property is the key to reducing your taxable income, and thereby increasing your potential tax refund.