Being a landlord offers plenty of opportunities for tax deductions, but it also means facing more expenses and extra responsibilities. 

The key to managing these property expenses effectively is to claim them correctly, ensuring nothing is missed, especially as the financial year draws to a close. 

To achieve this goal, understanding the difference between rental property depreciation and claiming expense deductions can improve your tax liabilities and keep the tax man onside.

For example, the Australian Taxation Office (ATO) closely scrutinises claims for repairs and renovations. The costs of repairs to, say, a sun deck due to tenant damage are tax-deductible and can be claimed in this tax year.  

However, if the work results in an improvement or the replacement of the sun deck, it is considered a capital expense. In such cases, you can only claim some of that asset’s depreciation (the gradual wear and tear), not the entire cost in the year the money for the improvement was spent.

That said, depreciation and rental property expenses are tax-deductible, reducing your taxable income and lowering your annual tax bill. Expenses are deducted in the financial year they are paid and include:

Interest repayments on a mortgage for the investment property
Insurance
Property management fees
Maintenance and repair costs
Council rates
Strata fees

Conversely, depreciation is a non-cash deduction for the natural wear and tear of the property and its assets over time. This deduction doesn’t require actual expenditure to claim. 

Claiming an expense

Rental property expenses are straightforward to claim. You deduct them from your taxable income, and the claims usually require receipts as proof of the work or service. Your accountant can calculate these deductions during tax preparation. 

Claiming depreciation 

Claiming property depreciation involves additional steps, including “capital works deductions” and “plant and equipment depreciation”. Capital works deductions cover the structural components of the building, such as roofs, walls, and staircases. These are calculated at a rate of 2.5% for up to forty years. On the other hand, plant and equipment depreciation includes mechanical and removable assets such as blinds, carpets, and smoke alarms. These assets are deducted based on their effective life, either as immediate deductions or through a low-value pool. 

The best way to claim depreciation is by having a tax depreciation schedule prepared by a specialist quantity surveyor, like BMT. According to BMT’s research, about 80% of property investors still fail to utilise depreciation deductions fully[i]. This schedule lasts the property’s lifetime, and the fee is 100% tax-deductible before June 30. Your accountant will use this schedule to determine your annual depreciation deductions.

Property investors can maximise their tax benefits and manage cash flow more effectively by understanding the differences between depreciation and expense deductions, and by correctly claiming these deductions for owning and maintaining an investment property.

Contact your local Raine & Horne office today for more information about the investment property market in your suburb or town. 

[i] https://www.bmtqs.com.au/bmt-insider/tax-depreciation-facts/