6 Tax Saving Tips for Your Investment Property

By Moye Team
Published in Property finance
March 28, 2022
6 min read
6 Tax Saving Tips for Your Investment Property

“Winter Is Coming”, and that can only mean one thing: tax season is approaching! But this time, you’ll know how to save money on your investment property’s taxes.

Are you aware of all the income tax deductions that investment property owners like you are entitled to? Whether you’ve just purchased your first investment property or have a sizable real estate portfolio, are you aware of all the income tax deductions that investment property owners like you are entitled to?

To guarantee you’re not paying more tax on your rental than you need to, we’ve put together 6 practical tips to help you maximise your profits and reduce your tax liability. You’ll learn some clever strategies for lowering your taxable income from your rental property, as well as how to make it easier.

Remember to seek professional counsel for your specific case from a licenced property tax consultant.

1. Keep detailed, up-to-date records of all your outgoings.

Tax deductions are the most straightforward approach to save money on your investment property.

You’ll need to keep track of your receipts and bank statements to accomplish this.

The Australian Taxation Office (ATO) requires you to keep records of:

  • The date and cost of your property purchase (to work out if you incur a capital gain or loss when it comes time to sell)
  • You must report any rent or rent-related income on your annual tax return.
  • Any expenses you intend to deduct should include the following information: the name of the supplier, the amount of the charge, the nature of the products or services, and the date of the expense.

There are a plethora of options for organising these documents: keeping paper statements in a binder, manually filing them in a folder on your computer, using apps like Expensify to keep track of your costs, and so on.

A property manager might also be of assistance. The benefit of technology in property management is that it has simplified tax preparation. You may get a complete summary of your yearly statement by downloading it for free at Moye Property Management.

You’ll save time and money by having everything in one spot for your home and property management tax deductions.

2. Recognize the distinctions between capital works, repairs and maintenance

Do you believe that all repairs and maintenance charges for your investment property may be claimed as the same type of deduction? Reconsider your position!

Repairs, maintenance, and capital works are all classified differently by the ATO. If you wish to lower tax on your investment property, you’ll need to categorise these expenses appropriately when filing your tax return to guarantee your deductions are recorded correctly.

  • It is a repair if you’re replacing something that your tenants have worn out, damaged, or broken.
  • It is considered maintenance if you’re avoiding or repairing an item that has degraded in quality since you rented out your investment property.
  • A capital work is when you replace an entire structure that is partially damaged (such as all of your property’s fencing) or add a new structure (such as a carport).

3. Make a claim for capital assets and borrowing expenses

You may also qualify for tax savings on capital asset and financing/borrowing expenses related to your investment property. However, the size of the expense will determine whether you can claim the entire expense as a rental property tax deduction in the same year.

Capital Items

Assets over $300, for example, heaters and dryers are capital items that must be claimed over time.

These items are also referred to as depreciating assets because they have a finite useful life and will lose value over time and use.

You can claim the total cost of these assets over their estimated life. Special regulations apply to some purchases, allowing you to claim tax deductions more rapidly. The ATO’s instruction explains how to calculate the effective life of capital assets and how to claim tax deductions for them.

Capital item expenses under $300 can be claimed right away in the same fiscal year that they were purchased. However, if the item is part of a set (for example, you bought 1 dining chair for $250 as part of a set of 4 dining chairs), you will not be able to claim the full deduction right once because the total value of the set is over $300.

Expenses of Borrowing

Borrowing expenditures are any costs involved with taking out a loan for your investment property, and they can be deducted from your taxable income. This can be seen in the following examples:

  • loan establishment fees
  • lender’s mortgage insurance (insurance taken out by the lender and billed to you)
  • stamp duty charged on the mortgage
  • title search fees charged by your lender
  • costs for preparing and filing mortgage documents (including solicitors’ fees)
  • mortgage broker fees
  • fees for a valuation required for a loan approval.

If your expenses are less than $100, you can claim them in full for that fiscal year. If not, you can deduct this amount over the course of 5 years or the life of your loan (whatever period is shorter).

This ATO worked example demonstrates how to compute tax deductions for borrowing expenses and may be useful in calculating the tax break for your portfolio.

4. Keep track of your depreciation and capital expenditures.

A depreciation schedule is a list of the property’s capital assets worth more than $300, as well as the amount of depreciation you can claim each year. It’s an excellent way to reduce the amount of tax you’ll have to pay on your rental property.

Many of your capital items (washing machines, carpets, etc.) are expected to depreciate over time, so you’ll be able to claim deductions over their lifetime.

Similarly, you can claim capital works deductions for specific building costs over a number of years. This means that even work done on your investment property can be deducted from your taxable income.

A capital works schedule is a handy document that lists all of the construction and building-related work that has to be done on your investment property.

It consists of the following components:

  • Surveying, architect, and engineering fees are examples of preliminary costs.
  • The price of obtaining building permits
  • Building and construction materials costs
  • the expense of modifying or extending a structure
  • the cost of making capital improvements to the neighbouring property or structural changes to the current property

This schedule is also important for determining the amount of tax deductions you can claim for your investment property each year. Tax deductions for capital works are typically available for 40 years after the work is done. Your property must meet two conditions in order to be eligible for this ATO tax deduction:

  • be constructed after July 1, 1985
  • Is being rented or genuinely available for rent

You can also use the ATO’s calculator to figure out your depreciation and capital allowance.

Your property tax specialist will also be able to explain and assist you in calculating how much and for how long you can claim tax deductions.

The ATO only considers quantity surveyors to be properly qualified to give the schedule if you can’t accurately calculate the building expenses of your property. That implies that, while your accountant can assist you in keeping an accurate timetable, they are unable to estimate building expenses on your behalf.

5. Invest in a property with a negative cash flow.

If your property’s rental revenue is less than your interest payments and expenses for the year, it’s considered negatively geared. Is this a terrible thing, you might be thinking? Certainly not.

In fact, it’s one of the most effective strategies to lower your rental property’s income tax.

It comes with a lot of tax advantages. As a result, 60 percent of Australia’s investment homes are negatively geared.

Although you can’t get any direct tax benefits from negatively gearing your investment property, you can lower your taxable income, which lowers your tax bill indirectly.

You will be entitled to deduct the loss from your taxable income as a result.

Keep this investment plan in mind if you want to reduce the amount of tax you pay on your investment property.

Negatively gearing your investment property is not without danger. Before you go forwards with this option, make sure you read our article about negative gearing.

5. Use a property manager with care

Now that you know what expenses on an investment property are tax deductible, how can a property manager assist you?

All of your expenses may be kept in one place with the help of a good property management system. That way, at the conclusion of each financial year, you’ll be less inclined to go on a statement quest through email after email or through mountains of documentation in your home.

Asking your property manager to organise and pay all contractors, rates, and other charges is a great way to get the most out of their services for tax purposes.

Property management fees are also tax deductible, making it a terrific method to maximise the value of your investment property.

Compiling statements and receipts was the greatest tax-time pain point for 78 percent of our owners in a survey we did leading up to the end of the financial year this year. As a result, we have an EOFY pack to help our owners with their taxes, you can access this pack through your owner portal.

Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.

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Moye Team

Moye Team

Table Of Contents

1. Keep detailed, up-to-date records of all your outgoings.
2. Recognize the distinctions between capital works, repairs and maintenance
3. Make a claim for capital assets and borrowing expenses
4. Keep track of your depreciation and capital expenditures.
5. Invest in a property with a negative cash flow.
5. Use a property manager with care

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