Rental properties are a very lucrative investment opportunity for those involved in real estate. Apart from creating a property as an investment, it also turns the investment as a regular source of capital from tenants. However, rental properties also come with some significant taxes. But if you are smart enough, there are ways to save on the taxes. Let’s take a look at how you can claim tax refunds on your rental property.
Capital Gains and Tax
Before we delve into claims about tax deductions, we must understand an important concept: Capital Gains Tax. A capital gain is when the selling price of a property is more than its cost base. A capital loss is the reverse; the selling price is less than the cost base. The CGT is applicable when you derive capital gains from selling your property.
To minimize your CGT, the straight route is showing the capital gains as low as possible. There are perfectly legal ways to do so, primarily by including all possible expenses into the base cost of the property. You can also apply for capital losses from previous years if any. Creating the investment property depreciation schedule and capital works schedule is another way.
Tax Deductions You Can Claim
There are a variety of expenses you can claim for tax deductions, like:
- Advertising expenditure for finding tenants
- Any interest incurred over property investment loan
- Insurance of the property
- Travel expenses incurred while traveling to inspect your property (subject to scrutiny)
- Water costs
- Council costs, if any
- Management fees of your real estate, if you hired professional help for the same
- Deprecation on residential rental property assets like air conditioners
While it seems straightforward, being able to claim these tax deductions come with certain requirements. For starters, you must maintain all physical bills and/or bank statements for transactions covered above. Two things must also be maintained accurately: depreciation schedule and capital works schedule.
The depreciation schedule lists all the properties/assets you own on the rental property. It also mentions how much you can annually claim in depreciation tax deduction on rental property. The capital works schedule consists of the building and construction costs of the rental property. It is important to maintain all the bills while you were building the property. In case the bills are amiss, one can ask an architect or builder to assess the costs involved in the construction of the property.
Tax Deductions You Can’t Claim
There are also certain costs that you can’t claim for tax deductions:
- Any cost incurred while you used the rental property for your personal use
- All the utility bills paid by the tenants, like electricity, etc.
- The inherent costs associated with buying and selling of properties are already included within taxes and thus cannot be claimed for tax deductions
- Sometimes, owners borrow money against the property, like selling its equity or mortgaging it. The costs involved in such loans cannot be tax deducted.
Note: While we mentioned that inherent fees involved in buying/selling of properties are not eligible for tax deductions, many other charges during the buying/selling can be eligible for the same. Thus, it is advisable to maintain all bills of the process.
Rental properties are a great investment opportunity. By claiming the tax deductions in the right way, you can increase your profits from your property even further.