Buying an investment property opens up several tax deduction opportunities that can significantly enhance your investment's return. Understanding these deductions and how they apply from the outset is crucial for maximizing your financial benefits.
Tax Deductions Available When Buying an Investment Property
When you first purchase an investment property, several tax deductions are available to you. These include borrowing expenses, depreciation, interest on loans, and repairs and maintenance.
Borrowing expenses are deductible over five years and include loan establishment fees, title search fees, and mortgage broker fees. Depreciation deductions under Division 40 and Division 43 allow you to claim for wear and tear on the property and its fixtures. Interest on your investment loan is another significant deduction, as it is fully deductible when the property is rented out or genuinely available for rent. Repairs and maintenance costs that arise from the need to fix wear and tear can also be claimed.
A common misconception is that all expenses related to the property can be claimed immediately. However, borrowing expenses must be spread over five years, and only certain depreciation items can be claimed, especially after the 2017 budget changes affecting second-hand properties.
How This Works in Practice
Consider a scenario involving a 2010-built two-bedroom apartment in Richmond, Melbourne, purchased for $800,000. The investor incurs borrowing expenses of $3,000, including loan establishment fees and mortgage broker charges. They also purchase new carpet and a hot water system, costing $5,000 in total.
In the first year, the investor can claim $600 in borrowing expenses (one-fifth of $3,000), and approximately $1,250 in depreciation for the new carpet and hot water system, calculated using effective life rates under the current ATO guidelines. If the property generates $40,000 in rental income, and the investor pays $30,000 in interest on the loan, these deductions reduce their taxable rental income to $8,750. At a 37% marginal tax rate, this results in a tax saving of approximately $3,238 in the first year.
Professional Insight
In our experience, one of the most overlooked deductions is the borrowing expenses. Many investors forget these can be claimed over five years, leaving money on the table. Another frequent oversight is failing to claim depreciation on new assets due to misunderstanding eligibility post-2017 changes.
What most investors don't realise is the impact of timing on repairs and maintenance deductions. Only genuine repairs can be claimed immediately, while improvements must be depreciated. We often see investors missing out on legitimate deductions because they don't consult with a professional early enough.
When Does the Answer Change?
When Should You Seek Professional Advice?
Tax deductions for investment properties can be complex and subject to frequent legislative changes. Engaging a Chartered Quantity Surveyor for a depreciation schedule is essential, as they ensure all eligible deductions are identified. Your accountant can also provide guidance on structuring your finances to maximize tax efficiency.