The tax season is fast approaching and at Haiven Property Central we appreciate that the focus of our investors is to optimise their tax returns and maximise their income. However, it is important to be aware what, when and how you claim legitimate tax deductions on repairs and maintenance to your investment property. Keep on top of things with this rental property tax return checklist.
Review your finances
Before end of financial year its important to review your finances and ensure everything is up to date. This includes your income, expenses and bank statements. If your property is managed by Haiven Property Central we provide all our landlords an Annual Financial Statement for your property making it easier for you at tax time, otherwise you can refer to your monthly statements.
Keep your paperwork organised
Ensure you keep invoices, receipts and bank statements for all property expenditure and records of rental income.
Your accountant will need the following to prepare your return:
- Bank statement for property related accounts
- Invoices and receipts relating to your property expenses
- Insurance documents outlining your insurance premiums
- Statement of income and expenses from your property manager
- Rate notices
As an owner you must keep these records for five years from the date of your tax return lodged.
When it comes to what you claim here is what you can and cannot claim as deductions
Items that can be claimed:
- Interest is by far the largest tax deduction in a negative gearing arrangement. Provided your property is available for rent, the interest incurred on money you’ve borrowed for the property is tax deductible offset by the rental income you receive
- Borrowing expenses
- Advertising fees
- Agent fees
- Legal costs
- Council rates
- Water rates
- Water usage
- Land tax
- Strata levies
- Cleaning and gardening costs
- Insurance premiums
- Security monitoring
- Pest control
Items that cannot be claimed:
- Property purchase costs such as stamp duty
- Renovation costs for newly purchased properties
Here is some information when it comes to repairs, maintenance and improvements and what can be claimed.
You can claim an income tax deduction for your costs in repairing and maintaining your investment property in the year you pay them, as long as the property is being rented out.
You can’t claim these costs if the damage or deterioration existed when you purchased the property, even if you carried out these repairs to make the property suitable for renting. These would become part of the depreciating assets.
What is the difference is between repair, maintenance and improvements.
- Repair is usually partial repair to restore something to its original state; for example, replacing two palings in a fence.
- Maintenance is work that prevents deterioration or fixes current deterioration such as painting the property or oiling the garage door.
- Improvement makes something better than it originally was. It provides something in a new or more desirable form and generally improves the property’s income production or expected life, for example if you replace an old garage with a brick lock up.
If the work on your investment property is classed as either repair, maintenance or improvement this will determine if the cost can be an immediate deduction or depreciated over time.
What is a depreciating asset?
Depreciating assets are standalone functional units that are not generally affixed to the building that decease in value over time. Examples include clothes dryers, dishwashers, paint, curtains and carpets. While the cost of buying a depreciating asset is not, in general, tax deductible upfront, the cost may be depreciated over the effective life of the asset and claimed as a tax deduction over a number of years.
The tax office provides suggested depreciation rates for different assets, but you are allowed to self estimate the effective life of a specific asset, as long as you can justify it. Otherwise there are companies that can prepare a depreciation schedule for you and your investment property.
What are capital works?
Capital works expenses are generally not tax deductible upfront. Unlike depreciating assets, capital works are generally done on things that are affixed to and become part of the land and building, such as an extension, structural alteration or and structural improvement, such as a retaining wall or a sealed driveway.
Find everything you need to know at tax time at ato.gov.au
*All information given is intended to be general in nature and is provided in good faith and is believed to be accurate and reliable at the time of writing and does not take into account individuals circumstances.
