With property remaining a high-priced asset, it’s more important than ever for investors to ensure their property investments are a financial success.

The latest data demonstrates property’s popularity. One-in-five households (21%) owns a home in addition to their usual residence.ⁱ

Maximising taxation benefits is one key element but the ATO recently found 9 out of 10 returns were incorrect, so it’s essential to check your paperwork as we approach the end of the financial year.ⁱⁱ

Get your structure right

As with any investment asset, ensuring the right ownership structure for a property asset is vital because it can make a big difference to your tax position each financial year.

It’s also sensible to check if you are using the right structure to help protect your investment from creditors, provide income in retirement, or cope with the unexpected death of a part-owner.

Managing the loan

Once you establish your investment loan, tax still remains a consideration. Any deductions you claim for your loan expenses must directly relate to earning assessable rental income.ⁱⁱⁱ

In cases where money from the loan is used for both private and income-producing purposes (such as a property partly used for rental and partly as your home), you must split your claims into deductible and non-deductible amounts.

If you use the redraw facility on your home’s mortgage to fund an investment property, you won’t be able to claim the interest as a deduction if you subsequently use your family home as a rental. There are also capital gains tax (CGT) implications with this strategy.^iv

Costs related to loan establishment fees cannot be claimed as a deduction upfront and must be spread over the term of the loan or a five-year period, whichever is shorter.^v

Rental deduction dangers

Although many investors focus on the tax deductions they can claim from a property asset, both rental income and deductions are key areas of ATO interest.

Detailed records are required to substantiate all claims and any rental income from ‑short-term arrangements and insurance payouts must be included in your return.^vi

You also need to be careful not to overclaim. Many new investors make the mistake of claiming an immediate deduction for initial repairs after purchasing a property. Existing damage must be claimed over several years as a capital works deduction and is used when working out your capital gain or loss when selling.^vii

Deductions such as advertising for tenants, professional property management, council rates, land tax and strata fees, building and landlord insurance, and pest control can only be claimed for time periods directly connected to earning income.

Depreciation or capital works?

Property investors are able to claim a wide range of deductions for expenses associated with maintaining and financing property assets, but care is needed.

Claims for depreciation of assets with a limited effective life (such as freestanding furniture, washing machines and TVs), can be made each year, but deductions for capital works must be spread over 40 years following construction. Capital works include improvements or alterations such as adding a driveway or altering the building.^viii

Improvements such as renovating a bathroom, are a building cost and must be claimed at 2.5 per cent annually over 40 years from completion.^ix

Check your CGT

When it comes time to sell your investment, an important consideration is capital gains tax (CGT). The key to making your investment tax-effective is to ensure you have identified all legitimate expenses contributing to the property’s cost base so you can correctly calculate the capital gain or loss.

The property’s cost base includes the price paid plus your buying and selling costs (such as stamp duty, legal fees and the agent’s commission). You are not permitted to include amounts already claimed as a deduction, including depreciation and capital works.

Any capital gain must be included in your tax return for the income year the property is sold, while capital losses can be carried forward and used in future years.

To ensure you are making the most of your investment assets, call our office today.

i Housing Occupancy and Costs, 2019-20 financial year | Australian Bureau of Statistics (abs.gov.au)
ii https://www.ato.gov.au/Media-centre/Speeches/Commissioner/Commissioner-s-address-to-the-Tax-Institute-s-Tax-Summit-2022/
iii, iv https://www.ato.gov.au/api/public/content/530c1d629e07404aa4405dbe664b8011?v=0ced7a8c
v https://www.ato.gov.au/individuals-and-families/investments-and-assets/residential-rental-properties/top-10-tips-to-help-rental-property-owners
vi https://www.ato.gov.au/Media-centre/Media-releases/Get-your-rental-right-this-tax-time/
vii, ix https://www.ato.gov.au/Individuals/Investments-and-assets/Residential-rental-properties/Top-10-tips-to-help-rental-property-owners/
viii https://www.ato.gov.au/tax-and-super-professionals/for-tax-professionals/prepare-and-lodge/tax-time/tax-time-toolkits/tax-time-toolkit-for-investors