Understanding rental property tax deductions can save you a lot of money as a landlord. I hope this short article and checklist will help you to take full advantage of the tax benefits available to rental property owners.
Negative Gearing
If the total annual expenses of your rental property exceed the rental income, the property is negatively geared.
For example, if your rental income is $20,000 per year but your expenses total $25,000, you have a net loss of $5,000. This means your property is negatively geared.
You can offset the loss against your other income, reducing your overall taxable income.
To continue the example, if your taxable income is $100,000, and the tax rate is 30% you would subtract the loss of $5,000 from your taxable income so that you would now be taxed on $95,000. Your tax savings would be $1,500 ($5,000 x .30).
Deductions for rental property
When you’re looking at tax deductions you can claim for your investment property, you need to be very clear about the difference between a repair which is fully tax deductable and an improvement which is depreciated over time.
Repairs vs Improvements
Repairs are activities undertaken to maintain or restore a property to its original condition, ensuring it remains in a state of efficient working order. Repairs are typically undertaken as needed to address specific issues, Repairs generally do not significantly increase the property's value.
Repairs and Tax :Repairs are fully tax-deductible in the income year they are incurred. They are considered ongoing maintenance expenses necessary to keep the property in a rentable condition.
Examples of Repairs : Fixing leaks, repairing broken fixtures, repainting walls, replacing damaged carpet, and repairing plumbing or electrical issues are all considered repairs.
Be sure to time the repairs for when the property is tenanted or between tenancies with no private use in between.
Improvements involve enhancements or alterations that go beyond restoring the property to its original condition. They increase the property's value, extend its useful life, or adapt it to a different use.
Improvements and Tax : Unlike repairs, improvements are not fully tax-deductible in the year they are incurred. Instead, they are capitalized and depreciated over time. This means the cost of the improvement is spread out and deducted gradually over its useful life.
Examples of improvements : Adding a new room, renovating a kitchen or bathroom, installing a swimming pool, or upgrading to higher-quality fixtures are all considered improvements.
Deductions on a Rental Property Checklist
Bills
electricity bills
gas bills
water rates
local council rates
body corporate fees and charges/ strata levies
land tax
Tenanting
advertising for tenants
lease document expenses for – preparation – registration – stamp duty
property agent’s management fees and commissions
Banking
interest on loans used to purchase the property
bank charges
legal expenses
mortgage discharge expenses
cost of having a depreciation schedule prepared by a quantity surveyor
Insurance
building insurance
contents insurance
public liability insurance
loss of rent / landlord’s insurance
Repairs & Maintenance
repairs and maintenance
gardening and lawn mowing
cleaning
pest control
rubbish disposal
servicing costs e.g. servicing a water heater, maintaining a swimming pool
security patrol fees
Other
stationery and postage
telephone calls
secretarial and bookkeeping fees
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