With property prices on the up, many investors choose to invest in property which has proven to show significant capital gains over the years. Many investors focus on the capital growth over rental income, often showing a loss on their investment. This loss can be used against other assessable income; such as your salary which will in turn reduce your tax liability.
At Koste we specialise in maximising Tax Depreciation entitlements on your investment property. Although this is not a cash expense, investors are entitled to use this expense against their taxable income. With up to 80% of investors not utilsing this entitlement, many will pay more in income tax. We have listed below typical deductable property expenses and demonstrated how this effects your income tax in the example shown below.
Interest payments are typically the most significant property expense you will incur. These payments are deductable where; the property is income producing i.e. A property which is let, or a business premises used to derive income.
2) Depreciation
Depreciation is an allowance to compensate the tax payer for the deterioration of assets which will eventually need replacing. Depreciation allows assets to be written off over the life of an asset which is determined by the rates set by the ATO.
3) Property Management Fees
The fees incurred by an investor for property management payable to agents, body corportate or a property manager are tax deductable. On commercial tenancies, the tenant may pay a percentage of these costs which will be deductable as a operating cost.
4) Repairs and Maintenance
The distinction between what is claimed as Capital v Repairs and Maintenance shoudl be treated with caution. Typical rules include; Where you incur expenditure over and above making good wear and tear then this is capital expenditure and will need to be depreciated For more information please click here.
5) Insurance
Costs associated with the building and income risk for debts are tax deductable.
6) Rates
Unlike the rates on a commercial property, the tenant is not usually required to pay these. This expense is typically paid for by the landlord and is tax deductable as a operating expense.
7) Legal Fees
Legal costs incurred to obtain borrowings are tax deductable. However legal costs incurred to acquire a property are capitalised to the cost of the property and included within the depreciation calculation
8) Other
Other may include cleaning, water charges and the like. The ATO has listed property expenses which can be found by clicking here
The following example demonstrates the tax position with and without an investment property. This example also demonstrates the potential income tax savings where an investor also utilise their Tax Depreciation entitlements under ITAA 1997.
Note: Please seek advice from your accounant for income tax calculations, this example is for illustrative purposes only and should not be replied upon.
