Putting your money into bricks and mortar has been a traditional stalwart of investing for generations of Australians, and continues to be viewed as a solid place to park spare cash and build wealth in the long term. For many years a lot of us seem to have heeded the quote attributed to Mark Twain: “Buy land, they’re not making it anymore.”
An investment property put up for rent can earn you some handy income, and rent can help pay off the property itself, and there are a lot of tax deductible expenses associated with rental property. But it is a complex area tax-wise, and can bring elements of other tax laws to the table – such as goods and services tax, capital gains tax, depreciating asset calculations and even pay-as-you-go tax instalments.
Although property has the reputation of being less volatile than say the sharemarket, this isn’t necessarily always the case. Valuations for property can rise or fall depending on a lot of influences, and interest rates are ever changing, which makes maximising allowable tax deductions a priority for every rental property owner.
It will pay to keep proof of every income-related expense you can think of, so that you can claim everything possible later. It won’t matter if you find an expense isn’t deductible after all, but you’ll kick yourself if you don’t have proof of another expense that turns out to be allowable.
The Tax Office has become more hard-nosed about rental deductions, prompted by a jump in claims made in recent years that property owners were not entitled to make. And its recent compliance programs have promised to take a hard look at property investment related matters, especially for first time investors.
What you can claim
There are two broad categories of claimable rental property expenses – those you can claim in full in the same income year that you incurred them, such as repairs, council rates, insurance premiums and loan interest; and those that you need to deduct over a number of years, such as the cost of building improvements and the depreciation of assets.
Deduction for decline in value of assets
A depreciating asset will lose its value over an income year or years, and you are able to claim a deduction equal to that loss of value. Assets that can be depreciated include air conditioners, heaters, hot-water systems, vacuum cleaners, dishwashers, clothes dryers and much more.
Capital works deductions
Then there are deductions for certain types of construction, like adding a room, remodelling a bathroom or building a pergola. The deduction is also available if the works, for example, add or remove an internal wall, or otherwise structurally improve the property. But remember that you can only claim in relation to income-producing capital works. Members log in to see details of what’s claimable, what isn’t, and rates.
Rental income, capital gains
You need to include all rental income, including any bond money kept because of damage or rent default, in your tax return. When you sell your rental property you will make a capital gain (or loss) if you bought the property after September 19, 1985. A capital gain made on a rental property would generally be at least partially taxable to you.