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Maximise your tax deductions with property investments

Tax is one thing that we must all deal with throughout our lives. Whether it's goods and services tax (GST) added onto our daily purchases, business taxes or even income tax, it seems that the taxman is always lingering around every corner. 

When you become the owner of an investment property, you'll be responsible for a number of real estate-related tax expenses. This includes land tax, local council taxes, income tax and capital gains tax (CGT). 

Even though you'll need to pay your tax, there are ways that you can minimise it. There's even tax benefits that are available for investors. 

If you're a Queensland rental property owner and are looking for ways to be tax savvy, here are some tips to help you. 

Claim tax deductions

Yes, owning an investment property means there are many costs you'll have to pay. But at the same time, the ATO allows you to claim a handful of tax deductions, as it's a source of income for you. This can go a long way to reducing the amount of taxable income you have each financial year.

Once you determine which tax deductions you'll be making for the financial year, take the total amount off of your income to receive your taxable income amount. You only have to pay tax on your taxable income amount – so the smaller this is, the less tax you'll be paying. For example, say you earned $80,000 from your investment property in one year. Once you tallied up all of your expenses to $10,000, you'll be reducing your taxable income down to $70,000.

Fortunately, most of the costs that are associated with the maintenance or holding of your investment property are eligible for tax deduction. The key to being a savvy property investor and maximising your deductions is to educate yourself on what you can and can't claim.

Here's are just some of the expenses you have available to you:

Travel expenses

Let's face it – being a landlord means you're probably going to be quite busy managing your property. Even if you hire a property manager to do it for you, you'll likely be meeting your agent to discuss financial details, repairs or your tenants.

This might not be much of an issue for you if you live in the same region – or even suburb – as your investment property, but for interstate investors it can be costly. For investors who own multiple properties scattered about the country, the costs of travelling to and fro could be quite expensive.

However, this is a cost that you can claim as a tax deductible expense. The ATO allows you to claim the costs of travel for you to prepare a property for new tenants, collecting the rent, visiting your agent to discuss your property, repairing and maintaining the property due to wear and tear and conducting end of tenancy inspections.

If you're driving to your property, keep a log book so you can accurately monitor your car's usage and claim petrol costs accordingly. Keep all of your receipts for fuel, airline tickets or other modes of travel to support your claims.

Repairs and maintenance

Physical assets can get old and suffer from damage. As careful as your tenants might be, there's always going to be wear and tear at your home – it's hard to avoid. It could be threadbare carpets after years of use or even paint wearing off the front of the house. Fortunately for you, repairs and maintenance are tax deductible.

If a dishwasher broke and you had to hire a plumber or electrician to come fix it, this would likely count as a repair expense.

Be aware, however, that the ATO says you can't claim the cost of completely replacing something. Picture the example of a complete fence that has suffered from water damage. If you replaced this completely, it's not a repair. Instead, you might be able to claim capital works deduction or a deduction for the decline in value.

Keep in mind that repair and maintenance costs must be claimed within the same year that you pay them.

Home loan interest expenses

Finally, another key expense you can claim is for the interest charged on your home loan.

If your loan was used to purchase an investment property, buy a depreciating asset for your rental property, make repairs to the home or even finance some renovations, these are all eligible for home loan interest deductions.

However, there are some strict rules that apply. For instance, if you have a portion of your loan that's used for private purposes like funding a holiday or new car, you can't claim this.

You also can't claim interest on the loan if you start to use your rental property for private use. This means moving into the home as an owner occupier.

Aside from these costs, there's also other expenses like advertising for new tenants, property management fees, insurance, land tax and body corporate/strata scheme fees that are all allowable, according to the ATO.

As an investor, you'll need to stay on top of what expenses you're paying, when they're paid and how much they are. This can make claiming expenses at the end of the tax year a lot easier.

Reduce capital gains tax

There are also many other types of taxes that are associated with your property that you can reduce – one of which is capital gains tax. Regardless of whether you're an investor or the owner of a holiday home, CGT is payable on any profit that you make from the sale of your property. For instance, if your home was valued at $500,000 and it was sold at $525,000, that extra $25,000 will be taxable through CGT as it was more than the property was valued at. 

Keep in mind that CGT isn't applicable on homes that are your main residence.

As set out by the Australian Taxation Office (ATO), property investors can actually obtain a CGT discount once their property is sold. However, this discount is only available to investors who have owned the property for at least 12 months. This gives you a 50 per cent discount on the capital gain. 

The discount can get even better for those who are part of a self managed super fund (SMSF). Once your SMSF reaches pension phase, you won't have to pay any CGT on the profits made from the sale of your investment property. 

However, before your SMSF hits pension phase, CGT will be reduced to 15 per cent. Even better, if you own the property for more than 12 months, this drops further to 10 per cent. 

Create a depreciation schedule

Like any physical asset you buy, an investment property can suffer from wear and tear over time. In turn, this means it depreciates in value.

As a landlord, you're able to claim depreciation on assets that are part of your investment property. This can include items such as whiteware, furniture, appliances and even carpets.

When you first buy your rental property, find a quantity surveyor to create a detailed depreciation schedule. This will list values for all of the qualifying plant and equipment items and will outline the deductions you can make.

Once it's completed, it's used by your accountant when preparing your annual tax return. This schedule has the potential to save you thousands of dollars, so it's worth getting one drawn up by a qualified quantity surveyor.

Remember that each investment property and investor is unique. By speaking to a wealth building expert and financial planner, you can obtain advice on how to maximise your tax savings.