You must invest in residential property primarily to benefit from the power of compounding capital growth. Any tax benefits (negative gearing) are merely a positive consequence of this investment, not the reason for it. That said, of course it makes sense to maximise your taxation deductions wherever possible.  

Make it easy for yourself

Maintaining accurate and complete taxation records is necessary to ensure all tax deductions are captured and treated correctly.  

I encourage my clients to utilise their property managers services to make record keeping as simple as possible. This involves asking your property manager to pay for all property specific related expenses on your behalf. For example, if you receive a bill, forward it to your property manager and request they pay it. You may need to transfer some money into their trust account if there’s not enough rental income to pay for it, but that’s not a big deal. In fact, having your bills mailed/emailed directly to your property manager streamlines this approach.  

The advantage of getting your property manager to pay for all expenses is that it will be recorded in the end-of-financial-year income and expense summary that they will provide you. At the end of the financial year, you just need to provide your accountant two pieces of information: (1) the rental summary and (2) a summary of interest and bank fees. This makes record keeping very simple.  

Summary of most common tax deductions 

The ATO publishes taxation statistics for each tax year (the most recent data is from the 2018/19 tax year). This data covers the 2.8 million investment properties that are owned by 2.2 million taxpayers. The most common tax deductions were:  

 | Deduction expense | Proportion of total deductions
 | Interest on loans  | 47%
 | Capital works deduction  | 8%
 | Council Rates | 7%
 | Property Agent fees/commission | 6%
 | Plant depreciation | 6%
 | Repairs and maintenance | 6%
 | Body Corporate Fees  | 5%
 | Water charges | 4%
 | Insurance | 3%
 | Land tax | 3%
 | Other inc. cleaning, garden, adverting, etc. | 5%

Source: ATO 

Interest and bank fees 

Interest and mortgage related fees will likely be your biggest tax deduction so it’s critical that you ensure its complete and accurate. I wrote this blog in 2020 which lists ten rules to follow to ensure you maximise your interest deductions.  

Most banks provide year-end interest summaries (accessible via internet banking) which summarises the amount of interest charged in respect to each loan account. If you refinanced or restructured your loans during the year, you will need to include any interest charged in respect to loan accounts that were subsequently closed.  

In addition, you will need to identify all banking fees changed during the financial year. This includes monthly account fees, any once off fees (such as variation or discharge fees) and any borrowing costs (the deduction for any upfront borrowing costs that exceed $100, such as Lenders Mortgage Insurance, must be spread over 5 years). These fees are often debited to transaction accounts (not loan accounts).  

Depreciation tax deductions 

There are two types of depreciation tax deductions that you can claim in respect to residential property, being (1) capital works and (2) deduction for the decline in value of plant, equipment and fittings such as air conditioners, stoves and so on. Based on the ATO statistics above, these items account for 14% of total deductions claimed, so they can be material. Any depreciation claimed (or that you were entitled to claim) will reduce a property’s cost base for CGT

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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.