Investments should always be selected on the basis of the returns generated and how well the investment will help you meet your individual goals.
The rental income received is taxable to the owners of the property in the same proportion as the ownership interest as shown on the title. However, rental property can also take advantage of available tax deductions to maximise tax refund.
In this article we will cover followingrental-property tax deduction questions:
- Eligibility Criteria to claim deduction for rental property?
- List of rental property expenses which you can claim?
- What is Negative gearing?
- What is Capital gain tax?
1. Eligibility Criteria to claim deduction for rental property?
Rental property owner can claim a tax deduction for a wide range of the expenses related to your rental property including interest on the loan. These expenses can only be claimed if the property is rented or available for rent.
2. List of rental property expenses which you can claim?
Following expenses can normally be claimed on tax:
- advertising for tenants
- bank charges
- body corporate fees and charges
- building depreciation
- council rates
- depreciation of fittings and fixtures like stoves, carpets and hot water heaters
- electricity and gas
- gardening and lawn mowing
- in-house audio and video service charges
- insurance for building, contents and public liability
- interest on loans
- land tax
- lease document expenses for preparation, registration and stamp duty
- legal expenses (excluding acquisition costs and borrowing costs)
- mortgage discharge expenses
- pest control
- property agents fees and commissions
- quantity surveyor’s fees
- repairs and maintenance
- secretarial and bookkeeping fees
- security patrol fees
- servicing costs, for example, servicing a water heater
- stationery and postage
- telephone calls and rental
- tax-related expenses
- travel and car expenses for rent collection, inspection of property and maintenance of property
- water charges.
3. What is Negative gearing?
‘Negative gearing’ refers to the situation where the costs of owning your rental property exceed the rental income. The difference, which represents a loss, can normally be offset against your other income like salary and wages.
So, say your income is $70,000 a year but your property expenses are $20,000 a year, you will only need to pay income tax on $50,000.
The main advantage of negative gearing is that it makes a rental property much more affordable as the tax savings can be substantial. This way you’ll pay less tax. Note, capital expenses like the repayment of your loan principal or renovations that add value cannot be claimed as an ongoing tax deduction.
Similarly, if the rent outweighs the costs of owning the property, it is said to be ‘positively geared’ and you can expect to pay tax on the profit the property generates each year.
4. What is Capital gains tax?
If you make a profit on the sale of you property this means you have made a ‘capital gain’. This gain is taxable - the profit is added to your regular income in the year you made the sale, and the tax will be determined accordingly. However there are important capital gains tax concessions available to property investors.
Firstly, the cost base used to calculate the capital gain includes the price you paid for the property plus buying and selling costs like stamp duty, legal fees and agent’s selling commission. This helps to reduce the profit for tax purposes.
In addition, if you have held onto the property for over 12 months you are entitled to claim a 50% discount on the capital gain at tax time. For example, if you made a profit of $50,000 on the sale of the place but you have owned it for over one year, you will only pay tax on a profit of $25,000.