Do’s & Don’ts Concerning Investment Property Expenses
There are, in theory, three important facets in terms of maximising investment returns from a tax deduction perspective. These include capital works, depreciating assets and interest.
Capital works, or construction expenditure, is usually deductible at a rate of 2.5% over a period of 40 years.
DO: Ensure you ask the seller for a depreciation report when buying an investment property, in doing so you will be able to identify unclaimed construction expenditure.
Alternatively, you can arrange for a quantity surveyor to inspect the property and prepare a report to estimate what construction expenditure may be left for future claims.
Capital works include property extensions, any structural alterations or improvements, typically anything affixed to the ground or structure.
DON’T: You should never assume that the capital works value and the property purchase price are equal.
You are able to claim depreciation on capital expenses that are not capital works. These include items that are not affixed to the building, white goods such as fridges and washing machines for example.
The ATO has issued a tax ruling which lists hundreds of items and provides their suggested depreciation rates. You can find more information on this here:
DO: You are able to claim an immediate deduction for the entire cost of any asset which costs $300 or less. Any item costing over $300 must be claimed over the expected life of the asset in question.
Utilise the estimates provided by the ATO or self-asses. Standard estimates may not always be relevant to your particular circumstances.
Note: recent Budget announcements have restricted depreciation deductions for residential property, you should seek clarification from us before committing if this is important to you.
DON’T: Do not self-assess unreasonably. You must ensure your estimate is admissible.
Attempting to inflate the price of an item bought from a related party is another common no-no. “The law specifically provides anti-avoidance rules to neutralise the tax benefit associated with the inflated price”.
Improvements and Repairs
The distinction between repairs and improvements remains one of the most highly debated aspects.
Common sense would indicate that a repair job is solely intended to restore an item to its original condition. Anything above and beyond repair which improves or altogether replaces the original item will become the purchase of a new asset. The distinction is vital because a repair cost is fully tax deductible, whereas an improvement can only be claimed as a capital works or depreciation deduction.
Alleged repair costs are routinely checked by the ATO, especially when a person is renovating.
DO: Ensure you ask your tradesmen for itemised invoices so that you have evidence of which costs are repairs.
DON’T: If you choose to do repairs soon after buying, it may result in unexpected tax consequences.
As it is included in the cost base of the property you will not get any deduction upfront if you immediately spend money on repairing things after purchasing. By law, it is not considered a repair.
Generally, interest is the largest tax deduction that can be claimed by investors who need to borrow when purchasing an investment property.
Interest can be claimed on the money borrowed to purchase the property, carry out any maintenance and repairs.
DO: Divide the interest according to amounts borrowed for private and rental purposes, or consider opening an offset account when purchasing your first property.
Instead of putting money into paying down the loan you can put it into the offset account. In doing so, when you purchase your new property, draw the money from the offset account. There will be no need to apportion as the original loan is untouched.
DON’T: Upgrading your family home and turning it into an investment property is one of the most common mistakes made by people.
The general idea is to be able to pay your home loan as soon as possible. When buying their second property, people often redraw the amount from the original loan, not realising that the interest on the amount redrawn is now no longer tax deductible as it is attributable to the purchase of the new home.
You’re typically entitled to claim other expenses such as body corporate fees (excluding capital works), property agent fees and commissions, cleaning, gardening, council rates and insurance.
It is imperative you do this correctly, as every dollar you forget to claim costs you. However, ensure you do not attempt to claim deductions that you have no entitlement to, there will be consequences if there is an audit.
It pays to carefully manage your investment property.