Introduction
Acquiring an investment property continues to be a profitable method of increasing your wealth and securing your financial future. Purchasing an investment property often takes years of saving to build the required deposit, along with the sacrifice of a significant portion of income to repay the loan and interest.
To assist investors, the government provides certain tax incentives to promote properties as achievable assets within any portfolio. However, these incentives carry specific rules that you must apply, use, and claim in accordance with applicable taxation laws.
We advise you to hire a qualified tax accountant to assist you with your investment property tax return and maximise the deductions you can claim.
Property investors can tap into useful tax benefits, including:
- The ability to claim tax deductions for many costs of owning a rental property
- The tax shield that negative gearing produces
- The 50% capital gains tax (CGT) discount for holding the property for more than 12 months
Tax Deductions for Investment Properties
As an investment property owner, you can claim a tax deduction for a variety of expenses related to your rental property, including interest on the loan. You can claim these expenses against the income that the property produces if you have tenanted it or made it available for rent.
Under ATO rules, we consider expenses you incur while the property is tenanted or available for rent as rental deductions. A tax adviser can give you a clear picture of what you can claim under your individual circumstances.
You can generally claim the following expenses on your investment property tax return:
- Loan interest and ongoing loan fees
- Property management fees
- Advertising fees for tenants
- Council rates, land tax, and strata fees
- Repairs, maintenance, pest control, and gardening
- Building and landlord insurance
- Building depreciation plus depreciation of fittings and fixtures (stoves, carpets, hot water heaters)
- Stationery and phone costs to inspect the property
- Accounting or bookkeeping fees
You cannot deduct acquisition costs like conveyance costs and stamp duty. Instead, you must add these to the cost base for capital gains tax purposes.
Negative Gearing Explained
When the expenses of owning a rental property surpass the rental income, negative gearing takes place. You can normally use the difference (a loss) to offset against other assessable income or capital gains.
Interest Deductions in Negative Gearing
Interest forms the most important part of an investment property tax return under a negative gearing arrangement. As long as your property is available for rent, you can deduct the interest on any money you have borrowed for the property, including funds you used for:
- Purchasing the property
- Undertaking repairs and improvements
- Dealing with tenant-related issues
The law limits this deduction to borrowed money that you used for income-producing purposes. For example, if you take out a loan to purchase both a private living property and a rental property, you can deduct only the interest on the rental property, not the living property.
Positive Gearing
Investment properties don’t always result in negative gearing. If the rent outweighs the costs of owning the property, you have positive gearing, and you will need to pay tax on the profit that the property generates.
Capital Gains Tax (CGT) on Investment Properties
At some point, you may decide to sell your investment property. Any profit you make from the sale will trigger Capital Gains Tax (CGT). The law requires you to include the taxable portion of that profit in your assessable income for the year of the sale.
How to Calculate Your Capital Gain
You should calculate the cost base as follows:
- The original purchase price of the property
- Plus buying costs (stamp duty, legal fees)
- Plus selling costs (agent’s commission, legal fees)
Adding buying and selling costs helps you reduce the amount of profit for tax purposes.
The 50% CGT Discount
If you hold the property for more than 12 months, you can claim a 50% discount on the capital gain at tax time.
Example:
- You purchase the property for $400,000 (including all charges)
- You sell the property for $500,000 (including all charges)
- Your capital gain equals $100,000
- If you have held the property for more than 12 months → you assess only 50%
- Only $50,000 of the capital gain will attract CGT at your marginal tax rate
Conclusion: Why You Need Professional Help for Your Investment Property Tax Return
Individuals often find it hard to formulate an effective strategy to minimise tax on an investment property. Understanding complex depreciation rules, correctly applying negative gearing, and claiming the CGT discount present both opportunities and pitfalls.
A qualified tax accountant can:
- Help you maximise legitimate deductions that you may have missed
- Ensure you make negative gearing claims that comply with ATO rules
- Help you correctly calculate your cost base to minimise CGT on sale
- Keep you audit-ready with proper documentation
- Help you retain the highest possible return from your investments
Do not leave money on the table. Let A One Accountants help you file your investment property tax return with confidence.
Kindly fill out the Investment Property Income and Expenses Form.
Please use the form below to provide your rental income and deductible expenses. A One Accountants will prepare your investment property tax return and ensure you claim every deduction you are entitled to.