Tax deductions for your investment property

Tax deductions for your investment property

Almost a third of all home loans in Australia are for investment properties, according to ABS data. If you're one of these millions of people, then it's worth knowing that owning an investment property can allow for a large number of expenses to be deducted come tax-time.

Knowing what can be claimed on an investment property can save investors thousands of dollars every year on their tax returns, so it pays to know what you can claim (and what you can't).

All information in this article is sourced from the Australian Taxation Office's website - make sure you check with the ATO or with a qualified tax professional for information relevant to your personal situation.

Don't forget your rental income is assessable

According to the ATO, rental income is considered assessable income and is therefore taxable. The current marginal tax rates are as follows:

Taxable IncomeTax rate
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $90,000 $3,572 plus 32.5c for each $1 over $37,000
$90,001 – $180,000 $20,797 plus 37c for each $1 over $90,000
$180,001 and over $54,097 plus 45c for each $1 over $180,000

Therefore, a $100,000 income (before-tax) and a $25,000 per-year rental income would result in a total taxable income of $125,000, and would be charged at the 37% rate.

What you can't claim on investment properties

We'll start off with what you can't claim on an investment property before moving onto the good stuff.

The things that can't be claimed on an investment property can essentially be boiled down to:

  • Any expenses relating to your personal use of the property: you can only claim expenses on parts of the house used for investment purposes, so tough luck if you live in it.

  • Any expenses paid for by the tenants: bills you pay for might be deductible, but anything the tenant themselves pay for (like utility bills) are not.

  • Borrowing costs where you've borrowed against the equity in the property for personal use

  • Costs related to the purchase or sale of the property

In addition to these things, the principal amount borrowed is not tax deductible, but as we'll explain below, the interest on an investment loan can be.

What you can claim on investment properties

The ATO says anything used as an investment expense on a part of the house used as an investment property can be tax deductible. These expenses can be separated into two main categories: management costs and borrowing costs.

Management and maintenance costs

A vast number of expenses paid to maintain the property can be deductible. These costs typically include: 

  • Utility bills paid by you
  • Repair and maintenance fees
  • Home, contents and landlord insurance
  • Travel expenses (like petrol) for inspections
  • Advertising costs for new tenants
  • Cleaning costs and pest control
  • Council rates
  • Property manager fees
  • Gardening and lawn mowing
  • Body corporate fees for apartments
  • Depreciation on assets like whitegoods (fridges, washing machines etc.)

Consider consulting an accountant to find out what you might be able to claim on your property. Just remember that golden rule: these are only deductible if used for investment purposes. So moving furniture in that you intend to use when living in the house probably doesn't count.

Borrowing expenses

Equally important expenses that can be deducted are borrowing expenses.

The main borrowing expense you can deduct is interest on an investment property loan. While you can't deduct the principal (aka the initial amount borrowed per the terms of your loan), any interest accrued on your regular repayments can be claimed as an investment expense. Interest-only loans are a popular option among investors since they temporarily allow them to deduct their full repayments for a period before the loan reverts to both principal and interest repayments.

Other borrowing expenses that can be claimed on tax include:

  • Loan establishment fees
  • Lenders mortgage insurance if paid
  • Mortgage broker fees
  • Stamp duty fees

Land tax is also tax deductible, so make sure you factor this in as well. Check the ATO for a comprehensive list of what borrowing expenses you can and can't claim.

Other tax discounts you can take advantage of 

Two tax breaks that were a hot topic in the 2019 federal election - negative gearing and capital gains tax - have remained unchanged, after major overhauls were promised by the losing party. Properly taking advantage of these two things can help add to your savings pile, which could have grown quite large already following all of the above deductions.

Negative gearing

Negative gearing is when you deduct losses made on your investment property in a financial year from your total taxable income. You make a loss on an investment property when the pre-tax costs of owning and paying for the property (maintenance + loan repayments, for example) are greater than the rental income you receive from it.

This isn't actually a money-making strategy, as you're simply shifting that loss somewhere else to lower your taxable income, but it's useful for minimising short-term losses until you eventually sell the property for a profit. Selling for a profit also attracts the capital gains tax (CGT), which can also be lowered if you're a savvy investor.

Capital gains tax

Any capital asset sold, like property or shares, comes with either a capital loss (selling for less than the purchase price) or a capital gain (selling for more than the purchase price). The capital gains tax is applied to profits made on investments, where the capital gain made is added to your assessable income.

CGT can take a big chunk out of profits made on house sales, as many properties can make profits of hundreds of thousands of dollars. But if you've held the property for more than 12 months, then the capital gains tax is reduced by 50%. That means you'd only add half of the profit made to your assessable income.

How to claim deductions on your investment property

The ATO has started cracking down a number of rorts, including those pertaining to investment properties. Making misleading or fraudulent claims on your investment property can lead to big fines, so it's important to get it right.

If you can't prove it, don't claim it. Keep all relevant receipts, invoices and bank statements as well as proof of rental listings and advertisements. The ATO states rental income and expense records need to be kept for five years, and you can't make a claim on your tax return without some kind of proof. So make sure you keep either physical or digital records and have them on hand when completing your tax return.

If in doubt, consult the ATO or a qualified accountant or adviser for help maximising your tax return on your property portfolio.