There are many tax benefits that come from being a homeowner in Australia. Whether you have an investment property or own your home, you’ll want to make sure you’re fully aware of all the various ways owning property can reduce the amount you stump up in tax to the ATO each year.
Tax incentives for homeowners
Home office
If you work from home from a dedicated space that’s your home office, you may be able to claim some big tax deductions. According to the ATO, if you work from home you can claim the work-related proportions of any extra household costs that you incur from working at home. For example, you might run several computers, a printer and the air conditioner in your home office, so you could deduct the proportion of your electricity bill that covers them.
Some further examples given by the ATO are:
- Heating, cooling and lighting bills
- Costs of cleaning your home working area
- Depreciation of home office furniture and fittings
- Depreciation of office equipment and computers
- Costs of repairing home office equipment, furniture and furnishings
- Small capital items such as furniture and computer equipment costing less than $300 can be written off in full immediately (they don’t need to be depreciated)
- Computer consumables (like printer ink) and stationery
- Phone (mobile and/or landline) and internet expenses
If you work solely from home in a dedicated home office you may even be able to claim tax deductions on your mortgage payments and home insurance.
Renting out a room
Regardless of whether you’re an owner occupier or an investor, you can claim tax deductions if you are renting out a room in your home.
According to the ATO, if you rent out all or part of your home, the rent money you receive is generally regarded as assessable income. This means you:
- must declare your rental income in your income tax return
- can claim deductions for the associated expenses, such as part or all of the interest on your home loan
- may not be entitled to the full main residence exemption from capital gains tax (CGT), meaning you'll have to pay CGT on part of any capital gain made when you sell your home.
If you’re only renting out part of your home, like a bedroom, you can only claim expenses related to renting out that part of the house. This means you need to apportion the expenses based on the floor area of the space you’re renting and add that to a reasonable amount based on their access to common areas.
Home transfer duty concessions
Transfer duty is an additional levy imposed on any property sale in Australia. Also known as stamp duty (a legacy from when all transactions had to literally be stamped by a government official to be valid), transfer duty is a state tax imposed on transactions involving several types of assets. The amount of duty that must be paid varies depending on the state or territory in which the property is located and the value of the property.
In some states and territories, concessions are available for certain types of property transactions. These might include:
- First home buyer concessions, which may grant reduction or exemption from transfer duty for individuals or families buying their first home.
- Concessions for off-the-plan purchases, which can provide a reduction or exemption from duty for individuals purchasing a new or substantially renovated property
- Concessions for properties that are located in certain regions or areas. Several states introduced initiatives to incentivise property investment in certain areas, often incorporating stamp duty exemptions. Property transactions in Regional Victoria, for example, continue to be eligible for transfer duty concessions as part of the Victorian Government’s Covid19 stimulus package.
Tax deductions for investment property owners
Renovations, repairs and home improvement
The ATO provide tax deductions for any expenses you have incurred during the process of making money. Since you rent out a property to earn revenue, anything you spend to maintain or improve your rental income can be claimed as a tax deduction. All costs associated with home improvement can be tax deducted, including renovations, repairs and maintenance.
If you do more extensive work like renovations or restorations, this is considered capital works expenses and deductions are generally spread over a period of 25-40 years.
Mortgage interest costs
If you’re an investor, there are also tax benefits you can apply to your home loan. You can claim a tax deduction for the interest you pay on your mortgage, which is part of the investment strategy known as negative gearing.
Negative gearing occurs when the cost of owning an investment property outweighs the rental income it generates.
For example, lets say your tenants pay you $20,000 in rent in a year. However, your loan repayments, combined with the maintenance, body corporate fees etc., are $25,000.
You are losing $5,000 on your investment, an amount you can then deduct from your taxable income.
Depreciation
The ATO also allows you to make tax deductions for the decline in value of depreciating assets each year over the effective life of the asset. If you have an investment property, you can claim tax deductions on depreciation, which can include the decline in value to permanent fixtures like carpets, ovens, washing machines, dishwashers, blinds etc as well as the decline in value to the home’s structure.
For example, lets say you invest in a top of the range new washing machine worth $5,000. Using the prime cost method (one of two ways to calculate depreciation approved by the ATO), a washing machine is estimated to depreciate at 12.5% per year, over an eight year effective life. This means that every year, the washing machine is worth $625 less (5000*0.125=625). This is the amount you can deduct from your annual income from your investment property. You can continue to do this until the effective life of the asset expires, which in this case would mean you could claim $625 a year for eight years.
If you’ve bought a brand new or near-new property depreciation is even more important as brand new items are valued higher and tend to lose their value more quickly - just like a brand new car does.
Keep records and receipts
Whether you’re an owner occupier or an investor, it’s a great idea to keep records and receipts throughout the year to make it easier to claim these benefits come tax time.
Throughout the financial year, make sure you document your expenses, keep clear records and receipts and don’t forget to speak to you accountant or tax adviser about what tax benefits apply to you. Also, make sure that your income tax returns are lodged with the Australian Taxation Office (ATO).
If you would like to take advantage of the various tax benefits available to property owners, check out Loans.com’s range of discounted home loan offers and helpful guides here. You can also talk to one of our lending specialists, who can help you find the right loan for you.
