Owning an investment property should be looked on as owning a business, especially in regard to its ability to earn you an income. Some property investors take out investment loans to purchase investment properties simply to be able to make tax deductible claims that will assist them in lowering their overall income level. This is known as negative gearing. The ability to claim certain taxation deductions related to your investment property, was not initially intended to have the wealthy pay less tax but more of a recognition that the costs incurred are a legitimate part of business expenses.
The ABCs of claimable expenses can help you with your tax planning. The secret here being the necessity to keep accurate records, starting from the beginning with ‘A’.
'A' stands out in its representation of advertising:
You can claim the costs of advertising your investment property when informing potential tenants that it is available for rent. Wherever advertising costs are incurred, be it in newspapers, radio, television or through a real estate agent, record all these costs as they are legitimate claimable expenses.
'B's include claimable expenses such as:
- Bank charges, and we are all fully aware of how these charges can add up. Record them all, keep the bank statements. Include all the bank charges as they relate to your investment loans as well as any other bank accounts you may have set up in order to manage your investment properties. They are all claimable.
- If your investment property is a unit or a town house there may be body corporate fees involved. These fees normally paid quarterly cover costs like gardening, repairs, insurance, lighting (if it is communal lighting) and pest control etc.
- Borrowing expenses are the expenses you incurred when taking up your investment loans. These particular expenses are not claimable up front but are over five years or less if the term of the loan doesn't run for the five years. These claimable expenses include, loan establishment fees, mortgage stamp duty, valuation fees, mortgage broker fees, fees for preparing and filing your mortgage documents, mortgage registration fees, title search fees and Loan Mortgage Insurance (LMI) costs.
'C' is a big one and particularly important if you are building a new investment asset as it starts out with such things as:
- Capital works. Your claimable expenses for carrying out capital works is spread over a period of 25 or 40 years. The period will depend on the type of construction as well as the date the construction was finalized. To make sure you get you full entitlements here it will pay you to employ the services of a quantity surveyor. A quantity surveyor will maximize your deductions on your behalf by working out the year of construction, the construction costs and what you can rightfully claim each year. The building construction costs will include, Engineering, drafting, surveyors, architect and local government building fees and costs as well as excavation costs and foundation laying.
- If you happen to occasion problems in getting any construction costs right you can access the services of a qualified person for an acceptable estimate. The taxation office accepts the following people as qualified in this area: A clerk of works, a supervising architect who oversees the progress payment on the building, a qualified builder experienced in making such estimates or a quantity surveyor (the most used in these situations).
- Certain structural improvements can also be claimable. These expenses take in any extensions, alterations or improvements that have taken place since February 26, 1992. The types of improvements include such things as fences, driveways, car parks, retaining walls and sealed roads.
- While still with 'C' we must not forget council rates. Local government or municipal council rates are payable either annually or quarterly and are fully claimable as taxation deductions in regard to investment properties.
'D' stands for depreciation:
- As mentioned before you can obtain the services of a quantity surveyor for the purposes of calculating the level of depreciation you can claim on a rental properties structure but you can also use his or her services to calculate depreciation on other assets within your building.
- Certain assets such as carpets, curtains and blinds, dishwashers, air conditioning units, heaters, hot water systems, fridges, stoves, freezers, swimming pool filtration and cleaning utensils, televisions and washing machines. These types of depreciating assets decline in value over time and are therefore partially claimable. You will need to keep records of each item's purchase date and cost to enable yourself to make a claim in this area.
'G' covers gardening:
Yes both gardening and lawn mowing expenses are claimable, this includes tip costs, motor mower maintenance, garden tool replacement as well as any fertilizers, replacement plants and sprays.
'I' stands for two claimable items:
- Loan interest. We mentioned earlier that set up costs in order to secure your investment loans are claimable. So is the interest you pay in the regular repayments to your lender. Keep all your bank statements as regards loan repayments and calculate the interest component you pay annually. It is all claimable as a legal deduction off your earnings.
- Insurance premiums that you pay in relation to your property investment are also claimable. Insurance may cover items such as building protection against damage, theft, loss of rent and public liability. Mortgage insurance (LMI) was covered previously as part of borrowing expenses under 'B'.
'L' has two components, land tax and legal costs:
- Once you have completed a Land Tax Registration form your property will be assessed and you will be liable to pay land tax on your investment property on an annual basis. These payments are claimable.
- So are legal costs when incurred if you have to evict a tenant or you have to terminate a lease.
'P' accounts for pest control expenses and property management fees both are claimable and once again points to the importance of keeping accurate records.
'R' covers things like repairs and maintenance:
It is easy to get confused with repairs and renovations but the two are quite different and the taxation office treats them differently as regards them being claimable as taxation deductions on investment properties. The main difference being that repairs are fully deductible for the year in which the repair took place but renovations are claimable over a period of time.
The repairing of an item means making it sound again after it has deteriorated but otherwise leaving its general character untouched. Any repairs undertaken within 12 months of purchase are generally not allowed to be claimed at the time but if you keep records of these types of repairs you will be able to claim them off any capital gain when you come to sell the property. You can claim the cost of repairs in the year they occurred at the end of any tenancy when you are restoring the property to the condition it was previously in, this includes such things as painting and cleaning etc. The same rule applies even if you are restoring the property to private use after a period of rental.
'S' applies to stationery:
Stationery in this case is referring to good accurate record keeping. None of this advice will be any good to you if you don't keep good, reliable and creditable records. It can't be over stated because when you are a property investor much of your earning will be lost forever if you haven't kept good records that enable you to claim relevant taxation deductions.
'T' is important because of the following claimable deductions:
- Expenses connected to your payment of tax are in themselves tax deductible. Such things as tax advice sought from a registered tax agent, accounting fees and costs involved in getting your taxation returns ready.
- All telephone calls made in connection to your property investment are claimable as are travel expenses when going to visit your property for inspection purposes or rent collection. If your investment property in a far distance away, or interstate, you can claim air fares, and any other travel costs incurred in getting there and back home again. Once again it is in the record keeping that will allow you to make these claims. If travelling by car you will have to have the engine size recorded along with the amount of kilometres you had to travel.
'W' brings us to the end of our tax planning ABCs:
Water charges for any water used on your property are claimable as long as you yourself pay for the water and not your tenants.