An Investor’s Guide to Investment Property Tax Deductions

Maintaining investment properties may reduce the investor’s income taxes when certain expenses related to the investments are deducted from his income. Expenses relating to the maintenance of rental property are generally deducted from the investor’s gross income. When allowed as tax deductions, the amounts claimed will lower the total taxable income and reduce the investor’s tax bill. The Australian Tax Office allows only specific expenses as investment property tax deductions. These require proper recording and maintenance of records to substantiate expenses.

Investment Property Tax Deductions

Depreciation: Home appliances and furniture used in the premises of rental property undergo ordinary wear and tear over a period of time. The gradual deterioration reduces the value of these items which is quantified as depreciation. Depreciation does not involve an actual cash expense but it has the effect of freeing up some cash when deducted from the investor’s income.

Borrowing expenses: These refer to the costs related to borrowing money used to purchase property. Deductible expenses from borrowing include mortgage insurance, title search fees, registration of mortgage, stamp duty on mortgage and loan establishment fees.

Commissions and management fees: These costs pertain to fees paid to agents responsible for renting out property. It is often expressed as a percentage of the rental fee.

Insurance: These include insurance on building, contents, public liability and landlord insurance which insure the investor against default rent. Mortgage insurance is deductible but not all at once and is usually amortized over the loan term as part of borrowing expenses.

Gardening and yard work: Expenses related to the maintenance of rental property are deductible and include dump fees, mower expense, tree lopping, replacement garden tools, fertilizers, sprays and replacement plants/.

Interest expense: The interest payments made on a loan used to purchase, build, improve or repair property for income purposes is deductible.

Repairs: These may be deducted only when the investor can show that the expenses were incurred for restoring property to its former condition without changing its essential character. Examples are costs for repainting, cleaning and other restorative works.

Telephone and travel expenses: These expenses are deductible from income when used for the collection of rent, repairs, inspections and preparing the property for new tenants.

Other expenses which may be claimed as investment property tax deductions include lease expenses, cleaning, electricity and gas expenses, land tax, legal and management fees, office supplies, pest control, and council, water and sewerage rates.