Investing in property has been a popular path for Australians looking to build wealth. According to the Australian Taxation Office (ATO), more than 2.2 million Australians, or around 20% of the country's 11.4 million taxpayers, owned an investment property in the 2020-21 financial year, the latest period covered by the ATO's official data. Typically, investors account for around 30% of the home lending market with around 57% of Australia's household wealth currently held in housing.
In recent years, Australia's tight rental market has seen rents nationally hit record highs. This has been fuelled by record immigration, plunging rental vacancy rates, and slumping building approvals for new dwellings. While some investors may have reaped growing income from their property investments, many others have chosen to leave the market as higher interest rates and inflation-driven costs have squeezed affordability of their rental properties.
As a property investor - or potential investor, it's vital to know how rental income is taxed and what rental property expenses can be claimed as tax deductions. Australia's tax laws pertaining to investment properties are also quite different to many other countries. Here is a handy guide to the basics:
Related: What are the costs of investing in property?
Rental income for tax purposes
In the eyes of the ATO, any income you receive from renting out your property – all or part of it – is considered to be assessable taxable income along with wages, share dividends, any interest earned from term deposits or savings accounts, and any other income sources. This means rental income must be declared in your annual income tax return and will be taxed at your marginal tax rate.
Current marginal tax rates in Australia (as at April 2024) are as follows:
| Taxable income | Tax on this income |
|---|---|
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 - $120,000 | $5,092 plus 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37c for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45c for each $1 over $180,000 |
As such, if your annual income before tax is $80,000 and you receive $20,000 in rental income a year (before deductions), that brings your total taxable income to $100,000. In simplistic terms (not taking into account deductions), you’d pay $24,967 in tax for the year, including the 2% Medicare levy. But property investors are entitled to claim a range of expenses as tax deductions.
Deductions that can reduce tax on rental income
Under Australian tax law, many property expenses can be claimed as deductions as long as they are for an investment property, not your principal place of residence. Some of the main types of claimable expenses include management and maintenance costs, borrowing expenses, and depreciation. Of course, you can't claim deductions on things you don’t pay for in the first place, such as improvements paid for by your tenants or any utility bills they pay. Let's check some examples of what you can claim.
Management and maintenance costs
- Advertising to find new tenants
- Rental agent or property management fees and commissions
- Body corporate fees
- Cleaning costs, pest control
- Electricity and gas not paid by the tenant
- Home, contents, and landlord insurance
- Gardening costs (although not major landscaping that will increase the value of the property)
- Legal expenses for matters involving rental activities
- Accountancy or tax advice costs associated with the rental property
Borrowing expenses
- Loan establishment fees
- Lender’s mortgage insurance (if applicable)
- Title search fees
- Mortgage broker fees (if applicable)
- Stamp duty (not tax deductible up front but can be claimed as a 'buying cost' when you later sell the property)
- Interest paid on an investment loan (but not the principal amount)
Depreciation
This covers 'wear and tear' expenses under two categories: 'capital works' on structural elements of the property and 'plant and equipment' on fixtures and fittings.
Captial works expenses can include work on:
- The roof
- Walls
- Driveway
- Exterior
Plant and equipment examples include:
- Carpets
- Appliances
- Curtains
- Air conditioners
- Furniture
Keep in mind, the above lists of claimable expenses are not exhaustive. It's recommended to check the ATO’s guidelines on investment property deductions for more information. Hiring an accountant can also be worthwhile if you’re struggling to keep track of permitted deductions, particularly seeing accountancy fees are tax deductible.
What you can't claim as a rental property expense
- Expenses from the personal use of your property
- Repayments of the principal borrowed to purchase
- Solicitor or conveyancer fees from the purchase or sale
- Travel expenses to carry out inspections of the property (not claimable since July 2017)
Don't forget about land and property taxes
But wait, there are more investment property deductions you can claim in the form of land and property taxes. Here are the main ones.
Property tax
This is more generally known as council rates which fund local government services such as rubbish collection and maintenance of local public facilities such as residential streets, parks, and libraries. The charges vary based on the location and value of your property. In Australia, council rates are payable by the owner of a rental property, not the tenants living there. These are claimable as tax deductions each year, but only for periods when the property was rented.
Land tax
In Australia, land tax is an annual tax payable on property you own that is not your principal place of residence. It applies in every Australian state and territory, except for the Northern Territory. In most jurisdictions, it is not levied on all properties, only those valued above a set land tax threshold. If land tax applies to your rental property, it is also tax deductible.
Capital gains tax applies to investment properties
Unlike your home - or principal place of residence in tax terms, when you sell an investment property, it is subject to capital gains tax. Basically, when you sell a capital asset (such as property or shares), you make either a capital gain (selling for more than you bought it for) or a capital loss (selling for less than you bought it for). Capital gains tax (or CGT) is a tax payable on any profit you make from selling your investment property. The profit is added to your assessable income just as your rental income was. Be warned, this can dramatically increase your taxable income.
However, a capital gains discount can apply to investors who’ve held their property for more than one year. The discount is currently 50% so if you made a profit of $100,000 on the sale of your property after more than a year, you will only pay tax on $50,000.
What about negative gearing?
Another tax concession on investment properties is negative gearing. This is not a term used by the ATO but a commonly used term to describe the situation when an investment property makes a net loss. The way negative gearing works is relatively simple – if you’re making a loss on your investment property (that is your expenses outweigh the income you receive), you can deduct this loss from your taxable income.
As such, negative gearing is not so much a money earning strategy, but rather a tax reducing strategy. You can use your rental property losses to reduce your taxable income in the short term with the aim of recouping the losses in the long term when you eventually sell the property - which brings us back to capital gains tax.
Conversely, a property is positively geared when the rental income received is greater than the expenses of owning the property. Of course, that profit is added to your taxable income.
One key takeaway is that negative gearing is only effective if you plan to carry that loss so that you might make a profit on the property at some time in the future. Ideally, this should compensate you for the years your investment property made a loss. Otherwise, you stand to make an overall loss on your investment property.
Always keep receipts for rental property expenses
According to the ATO, records of rental income and deductible expenses need to be kept for five years. This is especially relevant for long-term deductions like asset depreciation. Simply put, you can't claim any rental property expenses on your annual tax return if you can't prove the claim through a receipt or bank statement. It's strongly recommended to always keep meticulous records of expense receipts, either digitally or physically. The ATO provides a list of requirements for rental property records.
Savings.com.au's two cents
Taxation on rental property income and expenses can be complicated. When in doubt, refer to the ATO's extensive advice on the topic or seek the services of an accountant or tax professional. As one of, if not the biggest investments you'll ever make, you can't afford to not know what you are making or losing on your investment - or how much you could save by claiming all the many deductions available to you.
Image by Kelly Sikkema on Unsplash
Article originally published by Alex Brewster on 17 May 2021.
Updated by Rachel Horan on 17 March 2022 and Denise Raward on 23 April 2024.
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