A carefully selected investment property can provide both a regular rental income and healthy capital gain when the property is sold. In addition, investment properties offer two tax benefits not available with that other investments such as shares.
- Deduction for construction cost
If you select a property that was constructed during the correct time periods you will be eligible to claim an annual tax deduction of 2.5% of the property’s original construction cost.
Known as a Division 43 capital works deduction or construction write-off, this tax deduction applies to all residential properties that commenced construction after 16 September 1987. If you buy a non-residential property the eligibility period is wider, as construction can also have commenced between 20 July 1982 and 21 August 1984.
[Be careful, some investment property tax advice may still include other time periods when a 4% deduction applied. Unfortunately, if a property qualified at this rate the deduction has now ended.]
It is worth checking whether a property qualifies for this investment property tax benefit before you purchase. It can make thousands of dollars of difference to your annual tax bill. For example, if you buy a qualifying house that cost $300,000 to construct the Division 43 deduction will be $7,500 per year. For high-end houses or units it is not unusual for the deduction to be much higher.
Even if your property was built outside the eligible period, there may still be later alterations or additions that do qualify.
- Deduction for equipment and furniture
Division 40 of the tax legislation allows you to benefit by depreciating a range of equipment and furniture. You can claim these depreciation deductions regardless of when the property was built.
In residential properties the items you can claim include: carpet flooring, curtain and blinds, cooktops, wall ovens, dishwashers, hot water units, air conditioning units and smoke detectors. In unit complexes you can also claim part of the deduction for shared facilities such as lifts and swimming pool equipment.
It is not unusual for the Division 40 deduction to be more than $4,000 for the first year in a standard house and over $10,000 in a high-rise development. In very large high-rise complexes the deductions can be even more substantial. The size of this deduction varies substantially between properties and drops over the period of ownership. If tax deductibility is an important part of your purchase criteria it is wise to directly discuss the potential deduction with a depreciation specialist. Generic guides and apps sometime get it very wrong.
How do these property deductions benefit me?
Rental property expenses such as repairs, rental agent fees, council rates, and mortgage payments are deducted from the amount you are paid by your tenants to calculate your property’s taxable income. Division 43 and 43 deductions are treated as another expense that is deducted from your income.
One of the best points about these investment property tax benefits is that you can use them to offset not only the income you earn from the property but also income from other sources such as your salary. This process is called negative gearing.
How do I claim this tax deduction?
You need to be able to prove the property’s construction date and cost. If you did not construct the house yourself, you will need a cost estimate prepared by a quantity surveyor that is a registered tax agent. The quantity surveyor can also estimate the purchase value of the Division 40 items that came with your property and include them in your depreciation report. The cost of obtaining the quantity surveyors report is tax deductible.