Want to reduce the amount of tax you pay on your property investment? If so, you’ll be glad to know there are many ways to reduce your tax liability and keep more rental income in your pocket. And we’re not just talking about interest, negative gearing and capital gains tax either…
However, tax law can be fairly complex. So it’s no surprise that some investors miss their chance to claim the lesser-known tax benefits. Let’s take a look at some of these tax benefits and find out if you are eligible to claim them for yourself.
Holiday homes are taxed a little differently to rental properties. If you own a property that functions primarily as a holiday home, how you use the property will depend on what you can claim.
When the property is being rented out, you can make the same tax deductions as you would with a rental property. But when the property is not being leased out, you can only claim expenses during periods where you are making an active and continued effort to lease out the property (aka ‘genuinely available for rent’). This means the ATO will only accept these deductions if:
• The property is advertised in ways which give it broad exposure to potential tenants, and
• Having regard to all circumstances, tenants are likely reasonable to rent it
If you rent out your holiday home, and use it for private purposes in the same income year, you can claim deductions for the period when the property was either leased out to tenants, or genuinely available for rent. What if you lease out the property to family or friends? You can still claim expenses, but only if you charge rent that is equal to the market value of the property.
To prove that your property is genuinely available for rent, you have to advertise it to prospective tenants. Whether you choose to list the property yourself, or with a real estate agency, you can claim any expenses you incur which relate to advertising and marketing the property.
The most common advertising expenses you can expect to pay are professional photography, property styling, cleaning, video (and maybe even drone shots), a floorplan, signboard, brochures, and a written property description. You will also need to play a flat fee to have the property listed on various online platforms (e.g. Domain) and, if you wish, print media too.
If you list the property with a real estate agent, make sure you get a detailed breakdown of each cost that relates to marketing and advertising the property. This is important, as some real estate agents simply include these expenses as part of their commission fee, which can make it hard to tell exactly how much you are paying for.
As a property investor there may come a time where you have to face a legal claim. Property disputes can occur for a number of reasons, but under the ATO guidelines you can only deduct attorney fees when you:
• Are forced to evict a tenant from the rental property
• Take court action against a tenant for loss of rental income
• Defend a damages claim when a third-party suffers injuries on your rental property
Any legal fees you incur during the creation or purchase of property cannot be immediately deducted. However, you may be able to deduct them over time through depreciation.
Borrowing expenses are the associated costs that come with your home loan. These include loan establishment fees, lender’s mortgage insurance, mortgage broker fees, stamp duty charged on the mortgage, and title search fees charged by your lender.
When your total borrowing expenses are more than $100, you can spread the deduction by one of two ways: over the course of 5 years or the term of the loan. Choose the amount that is the lesser of the two. If you repay the loan within five years or less, you can claim a deduction for the balance of the borrowing expenses in the final year of repayment.
Keep in mind you cannot claim the amount you borrow for the property. And you cannot claim stamp duty charged by your state/territory government on the transfer of the property title.