Want to learn how to maximise your income by minimising your investment tax?
Look no further. Everything you need to know about buying, owning and renting an investment property is right here in the Etax Investment Property Tax Hub
- Find out which property investment tax expenses you can claim as tax deductions and what income you need to declare at tax time.
- Learn the common terminology you’ll hear over time as a property investor.
- Understand what, how and when you claim property investment expenses and when you need to pay Capital Gains Tax (CGT)
- And what is the difference between capital works and property maintenance?
It’s all right here, so let’s start with the basics of property investor tax rules:
#1 Property Investment Tax Records
Probably THE most important thing to remember and maintain, as a property investor, is all the financial records for your property investment tax returns.
If the car glove box, kitchen draw or a pile on your desk are regular havens for your property investment tax receipts, you’re going to lose out in more ways than one.
If you’re not organised with your financial records, it’s very unlikely that you’re going to remember where you’ve stashed the receipt for the tap you bought last August, or the repair receipt for your air conditioner in January. You may have a bank statement but the ATO and your tax agent will likely still want to see the receipt.
No record, means no claim, which means you’ll be out of pocket, year after year.
What records do I need to keep for my property investment taxes?
Buying cost records
You can claim the buying costs of your property (over time or when you sell) so you need to keep:
- Purchase contract
- Conveyancing documents
- Loan records
- Cost of purchasing the property
- Borrowing expenses.
Owner records
Documents and information related to owning your property such as:
- Diaries or schedules to show periods where you, your friends or family used the property
- Any periods when you used the property as your main residence
- Refinancing records, where relevant
- Records for any capital works (renovations) along with photos
- Copies of leases
- Expenses for periods when the property was rented or available to rent
- Depreciation report
Rental income records
Make sure to keep a records of all the income your receive including:
- A year end statement from your property or managing agent
- Bank statements that show rent payments into your account
- A record of any bond money you retain for repairs or cleaning
Property investment running costs
Keep every receipt and record for all of your running costs, these quickly add up throughout the year:
- Bank statements showing interest payments and expenses
- Property management statements (including marketing costs)
- Insurances
- Body corporate fees, if applicable
- Repair and maintenance receipts
- Rates and water bills
- Invoices, receipts and before and after photos for capital works (renovations)
- All other expense records relating to owning and maintaining your investment property
Records of sale
Finally, when you sell your investment property, make sure you keep those records too
- Sale contract
- Conveyancing records
- Real estate agent fees
- Capital gain or loss calculations
When can I claim property investment tax deductions?
You claim different types of expenses at different stages of your property investment’s lifecycle. Straight away, over time or when you sell.
Common property investment terminology:
Negative Gearing
Negative gearing is a common strategy used in property investment. It occurs when the expenses associated with owning and managing your property investment exceed the rental income it generates. The result is a financial loss on the property.
The positives for a property investor, when they are negative gearing a property, include the potential tax benefits. When you are negatively gearing, you deduct losses on the property from your taxable income. This means you pay less tax.
Of course, there are downsides when your property is costing more than the rent it is bringing in. The main and hardest issue is having to fund various aspects of the property investment, until such time that the rent can be increased to the point it covers costs and brings you a profit, or the value of the property increases sufficiently.
Fluctuations in the property market have a big impact on whether or not this strategy is effective or not. There are times when economic conditions can make negative gearing very difficult to maintain, so it’s important to get the right advice before you use this investment strategy.
Depreciation
Depreciation is the decrease in value of an asset over the course of what the ATO determines is it’s effective life This is the number of years the asset is considered to be useful before it needs to be replaced. Depreciation is a way for accountants to allocate an asset’s value over time when it costs $300 or more.
There are two ways to claim depreciation:
- The prime cost method: This method assumes a depreciating asset decreases in value uniformly over the course of its effective life.
- The diminishing value method: This method assumes a depreciating asset decrease faster in the earlier years of its effective life.
What about a depreciation schedule?
A depreciation schedule is a record of the value of your property investment and its assets. You should get a depreciation schedule done by a Quantity Surveyor before you rent out the property for the first time.
The depreciation schedule is a breakdown of the value of the property, plant and assets, along with the depreciation rates for the structural property itself and the equipment and assets within it.
Depreciation can be complicated so ask your tax agent to work it all out for you.
Capital Gains Tax (CGT)
Capital gains tax, often referred to as CGT, is the tax you pay on any profit you make on your property investment when you sell it. There are ways to reduce if you own your property investment for a number of years but CGT is often considered the ‘sting in the tail’ of selling an property investment.
For more information on Capital Gains Tax, read our article: Capital gains tax: Does it apply to you?
What else should I know about my property investment and tax?
Property investment tax deductions can be confusing, so let’s get to the bottom of the myths, the facts, the common mistakes and how to tell the difference between the types of expenses you claim on your property. Our property investment tax series has it all:
What about holiday rental properties?
Do you use your investment property or a granny flat as a holiday rental? If so, you need to make sure you’re declaring income and claiming your expenses.
Property Investor Tax Support
If you’re a property investor and need any help or advice for your investment tax returns, get in touch with Etax today. We’re always happy to answer questions and make sure you’re on the right track.
Further reading and resources:
- Depreciation: Prime cost (straight line) and diminishing value methods
- Buying and Managing: Property investment: Buying and managing an investment property
- SMSFs and property: Mixing property and your self-managed super
