One of the key advantages of investment property loans is that investment property expenses are generally tax-deductible, including refinancing costs.
Tax-deductible refinancing costs
If you decide to refinance your investment property loan (for example, to one with a lower interest rate), then many associated costs are tax-deductible. For example:
- costs for breaking your existing loan early (e.g., fixed rate break fees).
- costs associated with your new (i.e., refinanced) loan, such as application or establishment fees, lender valuation and/or title search fees for your property, mortgage broker fees, and lenders’ mortgage insurance (if applicable).
If these refinancing costs are over $100, they must be amortised either over 5 years or the remainder of the loan term, whichever period is shorter.
Refinancing costs that aren’t tax-deductible
It is important to understand that some investment property refinancing costs are not tax-deductible, just like some upfront investment property purchase expenses. Instead, these non-deductible costs are classified as capital costs and are added to the property’s cost base for capital gains tax (CGT) calculations if/when you sell. They include:
- conveyancing fees.
- building and pest inspection fees.
- stamp duty.
These costs will reduce your CGT obligations if you make a capital profit when you sell.
Other investment property tax deductions
The main investment property expenses that you can fully claim as tax deductions in the year they are incurred include:
- loan interest.
- council rates.
- insurance.
- property management fees (i.e., hiring the services of a property manager to manage your tenants on your behalf).
- strata/body corporate fees if you have an apartment, townhouse or villa.
- repairs and maintenance.
- accountant/tax agent fees.
- depreciation of your property’s assets (it is useful to hire the services of a quantity surveyor to prepare a depreciation schedule to maximise your depreciation deduction – their fee will be tax-deductible).
Besides the refinancing costs mentioned earlier, the other major investment property expense that you can claim over a number of years is renovation expenses to improve the value of the property. These costs must be claimed at 2.5% per year over 40 years).
The total amount of your tax-deductible expenses each year is offset against your rental income to minimise your taxable income.
Download a copy of our Property Investors Tax Return Checklist Here
Negative gearing
If your investment property expenses exceed your rental income, your property is negatively geared. Negative gearing can be more than offset over time by a combination of the following three factors:
1) the capital growth of your property
2) your reduced tax obligation
3) the fact that not all your investment property expenses may be ‘out of pocket’ expenses (for example, depreciation of your fixtures and fittings).
How we can help
Our tax professionals at Wilson Pateras can help you to maximise your investment property tax deductions to minimise your tax obligation. In addition, our lending and finance team can help you with an investment property loan, home loan or any refinancing enquiries you may have. Contact us today to find out we can help you.
This content has been prepared by Wilson Pateras to further our commitment to proactive services and advice for our clients, by providing current information and events. Any advice is of a general nature only and does not take into account your personal objectives or financial situation. Before making any decision, you should consider your particular circumstances and whether the information is suitable to your needs including by seeking professional advice. You should also read any relevant disclosure documents. Whilst every effort has been made to verify the accuracy of this information, Wilson Pateras, its officers, employees and agents disclaim all liability, to the extent permissible by law, for any error, inaccuracy in, or omission from, the information contained above including any loss or damage suffered by any person directly or indirectly through relying on this information. Liability limited by a scheme approved under Professional Standards Legislation.
Wilson Pateras Accounting Pty Ltd is a related entity of Wilson Pateras Lending and Finance (VIC) Pty Ltd and Wilson Pateras Financial Planning Pty Ltd (Wilson Pateras Group). Where you are referred to a related entity by your adviser and take up lending or financial services, your adviser and the directors and shareholders of the Wilson Pateras Group do not receive any direct remuneration or benefit as a result of these referrals but may be entitled to profits as part of their ownership in each entity. You are free to engage your own preferred professional service providers should you prefer.
