Posted on by Patrick Shi

What investment property expenses can I claim as TAX deductions?

In order to maximize your total tax deductible amount at the end of the financial year for a property that’s negatively geared, there’s a range of expenses that can be included in the total annual cost of the property for deduction purposes.

1. Prepaid expenses

It’s possible to claim any prepaid expenses that are related to your income-producing asset. If the payment covers a period of 12 months or less and the period ends on or before 30 June, the expense can be deducted immediately for that income year. But, if the repayment is for more than a 12-month period and more than $1,000, it may need to be spread over two years or more. Examples of expenses that can be prepaid include costs associated with preparation of leases, payment of interest, insurance, rates and body corporate fees.

2. Borrowing expenses
These are expenses directly incurred in taking out a loan for your property. They can include establishment fees, valuation fees, title search fees, costs of preparing and filing mortgage documents, stamp duty charged on registration of the mortgage and mortgage insurance (where applicable). Interest costs do not qualify as borrowing expenses. If the total cost of these items is over $100, the deduction is spread over five years or the term of the loan, whichever is the lesser. If the total cost is $100 or less, it is fully deductible in the first year. If you repay the loan early, and in less than five years, you can claim a deduction for the balance of the borrowing expenses, in the year of final repayment. If you obtained the loan part-way through the income year, the deduction for the first year is apportioned according to the number of days in the year you had the loan.

3. Mortgage discharge expenses
Provided that the mortgage was used as security for the repayment of money borrowed to produce assessable income, the costs of discharging the mortgage are deductible in the year they are incurred.

4. Legal expenses
There are a number of legal expenses which are deductible under various sections of the Income Tax Assessment Act. The most important of these are associated with the preparation of leases, the registration of patents, designs and copyrights, and debt collection fees. This can also include the costs involved in evicting a nonpaying tenant. Most legal expenses are of a capital nature and are, therefore, not deductible. These include costs of processes such as purchasing or selling your property, resisting land resumption and defending your title to the property. For capital gains tax purposes, however, non-deductible legal expenses may form part of the cost base or reduced cost base of your property.

5. Deduction for decline in value
of depreciating assets From 1 July 2001, the uniform capital allowance system (UCA) applies to most depreciating assets, including those acquired before that date. The UCA consolidates a range of former capital allowance provisions, including those relating to plant and equipment by providing a set of general rules that applies across a variety of depreciating assets and certain other capital expenditure. You can calculate deductions for your depreciating assets’ decline in value using these new rules, and then deduct an amount equal to the decline in value for an income year of a depreciating asset that you held at any time during that year. Examples of assets claimable as depreciable items include electronic security systems, air-conditioning units, rainwater tanks, roller-door motors, television antennas, television sets and washing machines.

6. Low-value pooling
You can allocate both low-cost assets and low-value assets to a lowvalue pool. Low-cost assets are all those that cost less than $1,000 not inclusive of GST and low-value assets are those that have declined in value under the diminishing value method to less than $1,000. The deduction for the decline in value of depreciating assets in a low-value pool is calculated using a diminishing value rate of 37.5%. Low-cost assets that are added to the pool are depreciated at half the rate – 18.75% – for the year in which they enter the pool.

7. Capital works deduction
You may be eligible to claim a deduction for the construction expenditure related to these expenses. Known as capital works deductions, these are usually spread over a period of either 25 or 40 years. It’s necessary to point out that total capital works deductions must not be greater than the total construction expenditure, and no deduction can be claimed until the construction is complete. Also, deductions can only be claimed for as long as the property is being rented, or is available for rent. Deductions for capital expenditure can be applied to a variety of works, for example, a building or extension – adding a pergola, a garage or another room – or alterations like demolishing or putting up an internal wall, or structural improvements such as a new fence or a retaining wall. Costs that are admissible in the expenditure total can include fees for engineers and architects, and payments to tradespeople like bricklayers or carpenters. However, you cannot claim for expenses such as clearing land prior to the construction, landscaping or the cost of the land that the rental property is built on, as the value of the land is not depreciated over time.

31 Replies to “What investment property expenses can I claim as TAX deductions?”

  1. I currently own a residential investment with an old (1950 built) garage.

    The garage is rather run-down so would like to demolish it, is this a claimable expense? And if so, is this considered a capital works or maintenance expense?

  2. This should be considered as capital works expense but not maintenance. See the rules from ATO Tax Guide.

    Repairs and maintenance

    Expenditure for repairs you make to the property may be deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.

    Repairs generally involve a replacement or renewal of a worn out or broken part – for example, replacing some guttering damaged in a storm or part of a fence that was damaged by a falling tree branch.

    However, the following expenses are capital, or of a capital nature, and are not deductible:

    1. replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
    2. improvements, renovations, extensions and alterations, and
    3. initial repairs – for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

  3. I am constructing a house for investment purpose at the moment. Can I claim following deduction in June 10 tax return:
    1. interest on the block of land.
    2. stamp duty on land.
    3. LMI
    4. Loan discharge (due to re-financing from other bank)
    5. interest on progress payments.
    House is due to be completed in Sep 10.

  4. Hi Anup,

    According to ATO:

    “… if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out.”

    I believe this means that you can claim:

    1. interest on the block of land.
    3. LMI
    5. interest on progress payments

    You cannot claim:

    2. stamp duty on land.
    4. Loan discharge (due to re-financing from other bank)

    As a general rule, while constructing an IP, you can claim holdings costs such as rates, interest, insurance and cleaning costs, but the buildings costs cannot be claimed. You can start depreciating the building, plant and equipment costs once the property is available for rent.

  7. hi

    I just wanna know that if I pay 10000 $ a year tax and I have a 300000 $ home loan on investment property , how much maximum tax refund I can claim

  8. Hi Sajid,

    I need more information to estimate that for you. The rental income, the expenses, the interest on your home loan, the age of your property, etc. A ball park figure of the tax you could possibly save from this investment property will be around $4000 per year.

    Cheers,

    Patrick

  9. I PAID A REASONABLE AMOUNT FOR MY INVESTMENT PROPERTY WHEN THE MARKET WAS PEAKING. NOW IT IS WORTH 60,000 LESS ACCORDING TO THE REGISTERED VALUATION. IS THERE ANY TAX BENIFITS FOR THE LOSS IN VALUE.

  11. We are demolishing a mobile home that will no longer be rented out after Nov. 2011. If we demolish it in Dec. 2011, can we deduct the demolition charges from income earned for the 2011 year even though we do not plan to replace the rental unit at this time?

  13. We have build a holiday house that we are renting out only sometimes on the weekends. Can we still claim rates, interest, insurance after or even before house was finished.

  14. Hi Liisa,

    I believe you can but you need to apportion the cost based on the time you use the holiday house as a rental property.

    Before the house was finished, you can claim the interest on your construction loan.

    Patrick

  15. I’ve just bought a investement property which have planning permit for 3 units. I’m going to demolish the existing house and build 3 units as per planning permit. Can I claim tax deduction for demolish cost?

  16. Hi Winnie,

    I don’t think you can claim tax deduction on the demolition cost. It should be treated as capital cost of the new building as the old building is being demolished for the purpose of replacing it with a new building.

    Regards,

    Patrick

  20. Thanks a lot for your help Patrick,

    Just a quick question, I need to get an GST invoice for that demolish cost or I can pay by cash and get a receipt?

  21. Hi Winnie,

    According to ATO, “If you buy property with the intention to sell it at a profit or develop it to sell, you may be considered to be carrying on an enterprise. If you are considered to be carrying on an enterprise and your GST turnover from these activities meets or exceeds the registration turnover threshold, you will be required to register for GST.” I think you should get an GST invoice for that demolish cost if you are registered for GST.

    http://www.ato.gov.au/businesses/PrintFriendly.aspx?ms=businesses&doc=/content/00221985.htm

    Cheers,

    Patrick

  22. Hi
    I have an investment property,the loan amount is $277k and i paid $19k interest this year.. How much should i expect back from my tax return?
    Thanks Carly

  23. – If I do initial work/repair, in this case painting. Can the paint I bought for $100 be claimed as capital works expenditure? ie. 40 years at 2.5%?

    – The lawn mower, high water pressure, cleaning equipment I purchased in order to complete the initial work, can I claim any of these as capital works expenditure also? and have them form part of the cost base for CGT purposes?

    Thanks.

    1. Hi Chi,

      According to ATO, “Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property are capital expenditure and may be claimed as capital works deductions over either 25 or 40 years, depending on when the repairs were carried out.”

      However, the tools & equipment you purchased should be classified as Depreciating Assets.

      Cheers,

      Patrick

  24. Hi,
    I am planning to purchase land that currently has an abandoned building to expand my manufacturing business.Thus, I will be demolishing the old building as it is not in the right condition and constructing a new one.
    My question would be, would I be able to deduct my demolition expenditure or would I have to include into my cost base for CGT purposes (as from what you have informed Winnie, above)?
    I have checked out the ATO reference you provided for Winnie, ATO ID 2002/514, but that has been withdrawn, would that mean that they have a different law now? Any other references to the law would be helpful mate!

    1. Hi Jason,

      I don’t think there is any real change to the demolition expenditure as the amendments to the Income Tax Assessment Act 1997 arising from Tax Laws Amendment (2006 Measures No.1) Act 2006 stated:

      “36 Subsection 110-25(5)
      Repeal the subsection (including the note), substitute:
      (5) The fourth element is capital expenditure you incurred:
      (a) the purpose or the expected effect of which is to increase or preserve the asset’s value; or
      (b) that relates to installing or moving the asset.”

      The only change from the ATO ID 2002/514 is now the new rule includes capital expenditure that to preserve the asset’s value. Nothing changed to the fact that “If the taxpayer can show at the time a subsequent CGT event happens to the land, that the expenditure on demolition is reflected in the state or nature of the asset then the expenditure will be included in the fourth element of the taxpayer’s cost base.”

      Please see the latest INCOME TAX ASSESSMENT ACT 1997 – SECT 110.25:

      http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s110.25.html

      You may consult with your accountant for this issue.

      Cheers,

      Patrick

  25. Hi,
    I have a investment property, but I am planning to let my parents live in for free. Can I still claim the tax deduction for the loan repayment and maintainance expenses? Thanks,

    Jen

    1. No.

      Only if the property is producing rental income you will be able to claim all relevant costs including depreciation, rates, body corporate fees and interest from the point in time that it is rented.

      Cheers,

      Patrick

        1. According to ATO,

          “If you rent out part or all of your home at less than normal commercial rates – for example, renting to a relative – this may limit or negate the amount of deductions you can claim.”

          Patrick

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