When we talk about making money out of an investment property, two things first come to mind: the income from renting it out and the profit from selling it. These two surefire ways to generate cash flow. But as an investor, keep in mind that one of the biggest benefits you can reap is its tax benefits.
No, a powerful tax savings plan isn’t just about paying fewer taxes. It is about maximizing cash flow. It means letting you and your loved ones receive more money each and every month or year, which translates to supercharging your wealth.
Basically, the more deductions investors can claim on their property, the higher the tax benefit. As a wise property investor, it is imperative to claim as many deductions as you’re legally entitled to. Your goal is to shift the money that would otherwise go to the government back into your pocket.
To begin with, here are 5 things you can claim on your investment property to maximize tax savings.
1. Mortgage Interest
When you borrowed money and used it for your property, the interest incurred on the amount is tax-deductible. That includes the money you used to purchase and repair the property and address any tenant-related concerns.
Take note that the deduction may only be available to the extent that the owed amounts were used for income-producing activities. For instance, if you purchase both a home and a rental property, only the interests concerning the latter shall be tax-deductible.
2. Repair costs
When you purchase a fixer-upper property and you decide to restore it to its original condition, the expense of the repairs can be tax deductible. Some of the examples of repair are repainting damaged walls, fixing a leaking tap, replacing a damaged dishwasher, etc. The cost of repairing something is tax deductible, as long as it is not considered “initial repair” or a damage that existed after the property was purchased.
Just take note that a “repair” is different from “improvement.” The former is revenue in nature, and is therefore deductible. The latter, on the otherhand, is capital in nature, and thus cannot be claimed. Restoring something beyond its original condition, like replacing a functional wooden kitchen bench top with a granite one, would be considered as an improvement. Such costs may not be eligible for a tax deduction but may qualify for capital works deduction or depreciaton.
3. Tenancy costs
Do you use advertising to get tenants? Do you pay property managers to acquire tenants on your behalf? Do you obtain landlord insurance premiums? Any cost related to preparing or varying the lease with tenants is tax deductible.
4. Depreciating assets
Money can be reaped as assets depreciate or decease in value over time. Stand-alone functional units like dishwashers, washing machine, curtains, and carpets, are considered depreciating assets.
The cost of purchasing a depreciable asset is not tax deductible upfront but such expense may be depreciated over the useful life of the asset. With this, they can be claimed as a tax deduction over a number of years. There are certain methods to calculate depreciation, like the straight-line method. In Australia, the tax office provides suggested depreciation rates for different assets.
5. Capital works
While depreciating assets are stand alone units, capital works are done on things which are affixed to a particular building. Some of the examples are room extensions, structural alterations, and structural improvements. Similar to depreciating assets, the costs on capital works are not generally tax deductible upfront but you can wait for a couple of years to claim them.
Carmina Natividad is a savvy writer for Depreciator, an Australian-based business specializing in Tax Depreciation Schedules. Being an enthusiast of pursuing financial security herself, she writes and shares self-help articles focused on personal finance, tax planning, and property investing.