Claiming everything you’re entitled to from the ATO is one proven method of increasing your bottom line with investment property.

Investment property expenses you can NOW claim

Understanding the ATO’s latest rules on what you can claim on your rental property can significantly increase your returns.

The ATO allows you to claim an immediate deduction (against your current year’s income) for the costs associated with:

• maintaining
• repairing
• managing and
• improving your property, as well as
• mortgage interest and some legal costs

Maintain, repair or improve – BUT DON’T blur the lines

MAINTENANCE

The ATO defines maintenance as: “work to prevent deterioration or fix existing deterioration”.
• painting
• cleaning
• gardening
• lawn mowing and
• pest control

are all considered maintenance.

Something like regular servicing of the hot water system or air conditioning unit is considered maintenance as well.

REPAIRS

The ATO defines repairs as: “work to make good or remedy defects in, damage to, or deterioration of the property”.

So, for example, if the hot water system breaks and you pay to have it fixed – that’s a repair.

IMPROVEMENTS

The ATO defines improvements as anything that will increase the value or life of the property or anything that goes beyond the definition of repairing.

Replacing the old hot water system with a new solar system (even if the old system was no longer working) – that is considered as an improvement.

THE ATO EYES ARE WATCHING YOU…

The distinction is important (and the ATO keeps a keen eye out for improvements incorrectly claimed as repairs).

Maintenance and repairs are eligible for an immediate deduction. Improvements ARE NOT.

You also cannot claim a deduction for the cost of improvements in the year you incur them.

Capital improvements (such as renovating a bathroom or kitchen) must be claimed as capital works deductions over several years.

Property management AND maintenance of your records

Property management is generally an area where you will have substantial expenses, regardless of the age or condition of the property.

The ATO says expenses including:

• advertising for tenants
• body corporate fees and charges
• council rates
• water charges
• land tax
• property agent’s fees and commission, as well as
• insurance costs (building, contents, public liability)

may all be eligible for an immediate deduction in the year it is incurred.

It is important for you to keep accurate records to make sure you are claiming everything you’re eligible for to support your claims.

Interest just got interesting

It is common knowledge that you are able to claim against the interest paid on your investment loan, however, it is important to remember the property must be rented out or genuinely available for rent in the income year you are claiming a deduction.

You may not be aware however that you can also claim the interest on a loan used to:

• purchase a depreciating asset for the rental property (like a new hot water system)
• a loan used to pay for repairs to the rental property (like fixing the hole in the wall the tradies made while removing your old hot water system), or
• a loan used to fund renovations.

Legal expenses – we object!

Legal fees always sting a little, so it’s good to know the ATO will allow some of them to be claimed as deductions.

For example, if you have to pay legal fees to:

• evict a non-paying tenant, or
• take court action for loss of rental income, or
• defend a damages claim related to your rental property

you can claim them as an immediate deduction.

It’s all about YOUR opportunities

If you are not positioning yourself to take advantage of all the tax deductions available to you, then you are wasting these opportunities to have more money in YOUR pocket.

Understanding what you can claim, and then making a claim, is one of many proactive steps you can take to improve your financial position and gain a greater return on your investment(s).

It’s all about YOUR opportunities

If you are not positioning yourself to take advantage of all the tax deductions available to you, then you are wasting these opportunities to have more money in YOUR pocket.

Understanding what you can claim, and then making a claim, is one of many proactive steps you can take to improve your financial position and gain a greater return on your investment(s).

Did you know – you can claim your tax deductions back in your pay each week?

If you are struggling to finance your investment property week to week and cannot wait until the end of tax time, then you may request a PAYG withholding variation with your pay officer. This essentially means that the amount of tax you pay (according to your projected investment property deductions) can be withheld from the ATO each pay cycle and remains in your hands until it is reconciled in your tax return at the end of the financial year.

HOWEVER – it will mean you are unlikely to get a big fat tax return each year. So chat with us to see

About Property Loan Advisor

Our goal at Property Loan Advisor is to ensure you receive expert loan advice to suit your personal situation and property goals. We take the time to listen and understand your circumstances and what you would like to achieve in the future.

Contact us If you would like guidance on utilising rental tax deductions available to you in an ever-changing financial and taxation landscape, contact the office today for assistance.

Due diligence is everything when it comes to investing rental property. Check out the top 5 tips and strategies to help you grow your property portfolio.

1. Decide – Capital gains or rental return or both?

You need to consider whether you are chasing rental returns or capital gain. A rental return will help you pay off a property over time; Capital growth will allow you to use the equity to purchase future investment properties. You may decide to have a mix of both. It will come down to affordability. An experienced mortgage broker can assist with the ability to borrow.

2 Calculate the rental return

The very first step is to calculate the rental return on the property and ask yourself the question; does this meet my criteria for purchasing the property? Some people are looking to achieve a positive cash flow on the property others look for capital growth.  You can very easily do a “back of the envelop calculation” that requires finding out what the weekly rent potential is versus the value of the property.  If you want to achieve a 5% return you would look for a property where the rent is the same as the first three digits in the purchase price. For Example $400,000 house rents for $400 per week it is roughly a 5% return. In fact it is really 5.2% ($400X 52 ÷ $400,000) = 5.2%. Try it – it works! Given that interest rates are at an all-time low it becomes easier to seek a neutral or positive cash flow on the property.

3. What’s the property really worth?

It is really only worth what someone is prepared to pay for it. Statistical analysis will help; you can use RP Data or other vendors of data to offer comparisons. Things that can help your negotiations are how long the property is on the market for, where does the property “fit” with other properties similar to the one you are researching, has the vendor previously dropped the price. What is the condition of the property you are looking at? Bear in mind if you purchase a property that needs repairs this will impact your ability to borrow for that property. The bank may request to see that you have funds available to do repairs or decline the loan because it is not a good security risk for them.

4. What is happening in the local market?

1. Regardless of the statistical data when the valuer goes out to value the individual property, the fact is that the individual property is impacted by power lines, most people will view this as a health risk that they are not prepared to take. The majority of people may have trouble funding the property due to the adverse remarks that the valuer may add to the valuation report to the bank. Events such as murder or suicide that have occurred on the property will dramatically affect the sale and hence the value. Once a valuer makes comment on why the property is at a reduced sale price it will alert the banks to the risk and hence the ability to borrow, especially in mortgage insurance territory.
2. “I am looking to purchase a property in an area where all the other properties are listed at offers over $325,000. The property is 3bed, 1bath, 1car is perfectly fine condition the problem with the property is there are power lines running over rear of the property, which is the reason no one else is interested because it is well under what other properties have been selling for. A very similar property in the same street sold 2 months ago for $365,000.
3. You could take a market analyst approach and research everything online. However, in my experience the most definitive way is to visit the area yourself and burn some shoe leather whilst walking around talking to local real estate agents and neighbours of potential houses that you a looking to purchase. A perfect example of this was a young investor made enquiries about a property he was thinking purchasing.

5. Property management

It may be tempting to manage property yourself. If you are going to do this put a proper lease in place and collect the payments by direct debit. Even if the property it is rented to a family member.  There are two main reasons you should put the proper paperwork together; one is to establish “the rules of the game” making sure everyone is aware, all too often the relationship that starts off good can end in disaster. The other reason is that you will need to prove that you can service future borrowings. If the bank can not verify the income on a property rented to a family member then it is assumed that there is no income on that property. This makes life difficult if you want to refinance to get yourself a better deal or grow your property portfolio. Best option is to have a local property manager do all this for you. The good ones are worth their weight in gold!

Hi Felicity, I learnt a new word yesterday: macro-prudential. I understand the RBA is also talking about it in relation to investors. It looks like its going to be harder for investors to get loans. What is more scary I heard mortgage brokers saying the banks will soon increase interest rates for investors but keep owner occupiers loans low in a attempt to cool the property boom. Your thoughts? They have been advising investors to consider converting over to fixed interest rate loans.

Hi, great question – interesting term macro-prudential and what does it mean for investors? Macro-prudential controls are financial regulations aimed at minimising the risk to the financial system as a whole, while traditional micro-prudential regulation limits stress individual institutions.

They are measures that are not associated with the monetary policy (raising interest rates) which are designed to slow lending, particularly to property investors.

Some of these measures could include capping loan-to-value ratios or capping debt-to-income ratios or stress testing borrowers capacity to cope with rising interest rates.

At the end of the day, it is anyone’s guess as to what may happen. Growth in the market is not Australia wide and is mainly in cities such as Sydney and Melbourne. When I compare products in the market for investors small differences appear between owner-occupier and investor loans – for example, most lenders that offer Loans at 95% LVR will capitalise the mortgage insurance for owner occupiers but not for investors.

I think regardless of the financial landscape – the most important thing is to check in with your broker or banker when you are transacting a property deal and get the advice to match your circumstances and goals.

Fixed rates are historically very low now and great for locking in and knowing what your cash flow is, the downside is that if you sell the property in the fixed term you can be up for large break cost, so knowing what you want to do with the property determines what type of loan you would take up.