What investment property expenses can I claim as TAX deductions?

In order to maximize your total tax deductible amount at the end of the financial year for a property that’s negatively geared, there’s a range of expenses that can be included in the total annual cost of the property for deduction purposes.

1. Prepaid expenses

It’s possible to claim any prepaid expenses that are related to your income-producing asset. If the payment covers a period of 12 months or less and the period ends on or before 30 June, the expense can be deducted immediately for that income year. But, if the repayment is for more than a 12-month period and more than $1,000, it may need to be spread over two years or more. Examples of expenses that can be prepaid include costs associated with preparation of leases, payment of interest, insurance, rates and body corporate fees.

2. Borrowing expenses
These are expenses directly incurred in taking out a loan for your property. They can include establishment fees, valuation fees, title search fees, costs of preparing and filing mortgage documents, stamp duty charged on registration of the mortgage and mortgage insurance (where applicable). Interest costs do not qualify as borrowing expenses. If the total cost of these items is over $100, the deduction is spread over five years or the term of the loan, whichever is the lesser. If the total cost is $100 or less, it is fully deductible in the first year. If you repay the loan early, and in less than five years, you can claim a deduction for the balance of the borrowing expenses, in the year of final repayment. If you obtained the loan part-way through the income year, the deduction for the first year is apportioned according to the number of days in the year you had the loan.

3. Mortgage discharge expenses
Provided that the mortgage was used as security for the repayment of money borrowed to produce assessable income, the costs of discharging the mortgage are deductible in the year they are incurred.

4. Legal expenses
There are a number of legal expenses which are deductible under various sections of the Income Tax Assessment Act. The most important of these are associated with the preparation of leases, the registration of patents, designs and copyrights, and debt collection fees. This can also include the costs involved in evicting a nonpaying tenant. Most legal expenses are of a capital nature and are, therefore, not deductible. These include costs of processes such as purchasing or selling your property, resisting land resumption and defending your title to the property. For capital gains tax purposes, however, non-deductible legal expenses may form part of the cost base or reduced cost base of your property.

5. Deduction for decline in value
of depreciating assets From 1 July 2001, the uniform capital allowance system (UCA) applies to most depreciating assets, including those acquired before that date. The UCA consolidates a range of former capital allowance provisions, including those relating to plant and equipment by providing a set of general rules that applies across a variety of depreciating assets and certain other capital expenditure. You can calculate deductions for your depreciating assets’ decline in value using these new rules, and then deduct an amount equal to the decline in value for an income year of a depreciating asset that you held at any time during that year. Examples of assets claimable as depreciable items include electronic security systems, air-conditioning units, rainwater tanks, roller-door motors, television antennas, television sets and washing machines.

6. Low-value pooling
You can allocate both low-cost assets and low-value assets to a lowvalue pool. Low-cost assets are all those that cost less than $1,000 not inclusive of GST and low-value assets are those that have declined in value under the diminishing value method to less than $1,000. The deduction for the decline in value of depreciating assets in a low-value pool is calculated using a diminishing value rate of 37.5%. Low-cost assets that are added to the pool are depreciated at half the rate – 18.75% – for the year in which they enter the pool.

7. Capital works deduction
You may be eligible to claim a deduction for the construction expenditure related to these expenses. Known as capital works deductions, these are usually spread over a period of either 25 or 40 years. It’s necessary to point out that total capital works deductions must not be greater than the total construction expenditure, and no deduction can be claimed until the construction is complete. Also, deductions can only be claimed for as long as the property is being rented, or is available for rent. Deductions for capital expenditure can be applied to a variety of works, for example, a building or extension – adding a pergola, a garage or another room – or alterations like demolishing or putting up an internal wall, or structural improvements such as a new fence or a retaining wall. Costs that are admissible in the expenditure total can include fees for engineers and architects, and payments to tradespeople like bricklayers or carpenters. However, you cannot claim for expenses such as clearing land prior to the construction, landscaping or the cost of the land that the rental property is built on, as the value of the land is not depreciated over time.

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