Claiming losses from a rental property against your salary is a common strategy in Australia, known as negative gearing. This allows investors to offset the costs of owning a rental property, such as interest on loans, maintenance, and depreciation, against their taxable income, potentially reducing their tax bill.
Under Australian tax law, specifically the Income Tax Assessment Act 1997, you can deduct rental property expenses from your total income if those expenses exceed the rental income earned. This is particularly beneficial if you are in a higher tax bracket, as the reduction in taxable income can lead to significant tax savings. A common misconception is that this is a loophole or dodgy practice, but in reality, it is a legitimate and widely-used tax strategy.
To see how this plays out, consider a scenario where you own a 2010-built 3-bedroom house in Melbourne worth $800,000. Your annual rental income is $30,000, but your expenses, including loan interest, maintenance, and depreciation, total $40,000. This results in a $10,000 loss. If you're in the 37% tax bracket, this can reduce your tax bill by $3,700 in that year.
In our experience reviewing thousands of properties across Australia, many investors overlook the importance of keeping detailed records of all expenses, which can lead to missed deductions. Another common issue is failing to maximise depreciation benefits, especially under Division 43 for capital works. Investors also frequently misunderstand the implications of property improvements versus repairs, affecting their claims.
The answer can differ depending on your situation. For example, if you purchased a second-hand property after 9 May 2017, you might not be able to claim depreciation on previously used plant and equipment under Division 40. Also, if the property is owned by a company, the tax treatment differs as companies can't claim the 50% CGT discount. Properties owned by a Self-Managed Super Fund (SMSF) also have different rules.
Given the complexities involved, it's wise to get professional advice. A Chartered Quantity Surveyor can ensure that your depreciation claims are maximised, while an accountant can provide guidance on the broader tax implications, ensuring compliance with the latest ATO rulings.