Real estate investment: steps for bigger tax deductions this year

Many of Australia’s 2.2 million real estate investors are looking towards a bigger tax time windfall this year. Here’s why.

Real estate investors in Australia are a weird mob when it comes to tax.

When everyone else is struggling with the end-of-financial year rush, struggling to make sense of tax rules, or simply struggling to be motivated, landlords are often rubbing their hands together with glee.

That’s because tax time spells big bucks for many investors whose expenses exceed their income to deliver them negative gearing tax deductions.

Before Covid struck in 2020, property investors were booking more than $12 billion of net rental losses annually, according to the latest Australian Taxation Office data.

That number is likely to surge this year, thanks to the Reserve Bank of Australia’s run of interest rate rises that have pushed repayments up 50 per cent. Back in 2020, almost 60 per cent of property investors were booking net rent losses, and that proportion should rise sharply this year.

Negative gearing takes pressure off real estate investors’ finances but should never be their ultimate aim. A positively geared property that puts money into investors’ pockets – even if they have to pay income tax on some of it – is the best goal.

In the meantime, it’s worth knowing how to engineer the biggest refund possible. These four steps are worth considering.

MAINTENANCE AND REPAIRS

Trying to find a tradie during the June end-of-financial-year rush can be a nightmare, so if your property needs some work done, now is the time to start if you want the deduction this financial year.

The ATO says immediate deductions are available for repairing and maintaining the property, while money spent on additions such as patios, pergolas or carports are capital works items and their deductions are typically spread over a period of 25 to 40 years.

UPFRONT INSURANCE

Another regular expense for investors is landlord insurance, and a good move might be to pay the full year upfront before June 30.

The cost can then be deducted in tax returns from July 1.

PREPAYING INTEREST

Loan interest is the biggest single expense for property investors, and ATO data shows it topped a total $25 billion before 2020.

Some investors can pay a year’s interest in advance, bringing forward both the expense and the tax deduction. However, understand that if rates start dropping later this year as some economists are now tipping, this move could backfire.

DEPRECIATION

Deductions for the wear and tear of a new property’s fixtures and fittings, and even its bricks and mortar, deliver some of the biggest benefits – but not every investor takes advantage of this.

A professional depreciation report may cost more than $600 from quantity surveyors such as BMT Tax Depreciation or Washington Brown, but the deductions they deliver should outweigh the costs. If you haven’t had a report done yet, you can back-claim for two years of deductions – potentially delivering a huge refund.

The ATO releases rental property guides every year to help investors do their taxes, and this can be a great tool for finding and making deductions.

Originally published as Real estate investment: steps for bigger tax deductions this year