Owning property in Australia offers the potential for substantial financial gain, but it also comes with considerable tax obligations. The good news is that there are legal strategies to reduce the taxes you owe.
Whether you’re an experienced investor or just starting, understanding the complexities of property taxes can significantly impact your financial success. In this guide, we’ll share tips to help you avoid common tax mistakes, saving you both time and money.
1. Deducting Interest on Your Loan
If you’ve taken out a loan for your rental property, you can deduct the interest on the borrowed amount. However, you can only claim the interest portion related to the rental property. If part of the loan is used for personal expenses, such as a holiday or buying a boat, the interest on that portion is not deductible. Make sure to apportion the interest correctly for the entire loan term, including any refinanced loans.
2. Understanding Purchase Expenses
While you can’t deduct the costs of purchasing your property, such as conveyancing fees and stamp duty (outside the ACT), these expenses are important when calculating capital gains tax if you decide to sell the property.
3. Claiming Borrowing Costs
Borrowing expenses over $100 must be spread out over five years, while amounts of $100 or less can be claimed in the same year they were incurred. These expenses include loan establishment fees, title search fees, and the costs of preparing and filing mortgage documents. However, stamp duty on the property title is not deductible. Also, remember to apportion your borrowing expenses in the first year based on how many days you owned the property.
4. Distinguishing Between Initial Repairs and Capital Improvements
Not all repairs and improvements can be immediately deducted:
- Initial Repairs: If you’re fixing damage that existed when you bought the property (like a broken window or damaged floorboards), these costs are considered capital works and can be deducted over several years. They also factor into your capital gains tax calculation when you sell the property.
- Capital Improvements: Significant upgrades, such as replacing an entire roof or renovating a bathroom, are considered capital improvements. You can claim these building costs at a rate of 2.5% per year over 40 years from the completion date.
- High-Cost Replacements: For items detached from the house, like a hot water system costing over $300, you must claim the expense as a depreciation deduction over several years.
5. Dividing Expenses and Income in Jointly Owned Properties
If you co-own a rental property, ensure that both rental income and expenses are reported according to your ownership share. As a joint tenant, your share is equal; as a tenant in common, it depends on your specific ownership percentage.
6. Claiming Body Corporate Fees
You can fully deduct payments to the body’s corporate administration fund in the year they are incurred. However, if your body corporate raises funds for major capital improvements or repairs, these costs can’t be immediately deducted. Instead, you may be able to claim a capital works deduction for your share once the project is complete.
7. Keeping Precise Records
To claim deductions, you must keep detailed records of your rental property income and expenses. Additionally, for capital gains tax purposes, retain all records for the duration of your property ownership and five years after selling the property.
8. Allocating Deductions for Personal Use of Your Property
When your property is used for both private purposes and rental income, you need to apportion your deductions to accurately reflect the time and space used to generate income. If you rent out only part of your property or rent it out for part of the year, your deductions should be limited to the portion of time and area that was rented out. Private use includes personal use or renting to family or friends at below-market rates, as well as keeping the property vacant.
To claim deductions for periods when the property is vacant, you must demonstrate a clear intention to rent it out, such as:
- Advertising the property at market-competitive rates.
- Avoiding unreasonable rental conditions that would deter potential tenants.
9. Dividing Expenses and Income for Co-Owned Properties
If you co-own a rental property, it’s essential to declare rental income and claim expenses according to your ownership share. As a joint tenant, your share is evenly split, while as a tenant in common, your portion depends on your specific ownership interest.
10. Accurately Calculating Capital Gains on Property Sales
When you sell your rental property, you’ll either incur a capital gain or a capital loss, generally calculated as the difference between the cost base (what you paid to buy, own, and improve the property) and the selling price.
Important points to remember:
- Exclude amounts from the cost base that have already been claimed as deductions against rental income, such as depreciation and capital works.
- Reduce the cost base by the amount of capital works deductions claimed after May 13, 1997.
If you realize a capital gain, it must be reported in your tax return for that year. If you incur a capital loss, you can carry it forward to offset against capital gains in future years. This depreciation calculator can help you compute your gains.