Maintaining investment properties may reduce the investor’s income taxes when certain investment-related expenses are deducted from their income. Expenses related to the maintenance of rental properties are generally deducted from the investor’s gross income. Where permitted as tax deductions, the amounts claimed will reduce total taxable income and reduce the investor’s tax bill. The Australian Tax Office only allows specific expenses as tax deductions for investment property. These require proper recording and record keeping to substantiate the expense.
Tax deductions for investment properties
Depreciation: Appliances and furniture used in the premises of a rental property experience normal wear and tear over time. Gradual deterioration reduces the value of these items which is quantified as depreciation. Amortization does not involve an actual cash outlay, but does have the effect of freeing up cash when it is deducted from the investor’s income.
Borrowing costs: These are the costs associated with borrowing money used to purchase a property. Deductible borrowing expenses include mortgage insurance, title search fees, mortgage registration, mortgage stamp duty, and loan origination fees.
Commissions and management fees: These costs correspond to the fees paid to the agents in charge of letting the property. It is often expressed as a percentage of the rental price.
Insurance: These include insurance on the building, contents, civil liability and landlord’s insurance which insure the investor against unpaid rent. Mortgage insurance is deductible but not all at once and is usually amortized over the term of the loan as part of borrowing expenses.
Gardening and earthworks: Expenses related to the maintenance of rental properties are deductible and include landfill fees, mower fees, tree trimming, replacement garden tools, fertilizers, sprayers and replacement plants.
Interest charges: Interest payments made on a loan used to buy, build, improve or repair property for income purposes are deductible.
Repairs: These can only be deducted when the investor can demonstrate that the expenses have been incurred to restore the property to its previous state without altering its essential character. Examples are the costs of painting, cleaning and other restoration work.
Telephone and travel expenses: These expenses are deductible from income when used for rent collection, repairs, inspections and preparing the property for new tenants.
Other expenses that can be claimed as tax deductions for investment properties include rental costs, cleaning, electricity and gas expenses, property tax, legal and management fees, office supplies , pest control and municipal, water and sewer rates.