What deductions can be claimed for an investment property?

Posted by Bizink on Dec 5, 2015 11:21:56 AM

Case study: for $35 per week, you could own an investment property too

Owning an investment property can be far more affordable for potential investors than they think, particularly when they claim all of the tax deductions available to them.

To explain how claiming these deductions can assist an investor to purchase a property, let’s examine the situation of two average Australian taxpayers; John who feels he currently is unable to afford an investment property and Lisa, who owns one investment property.

What deductions can be claimed?

The Australian Taxation Office allows income producing property owners to claim a number of deductions for expenses involved in holding a property including property management fees, rates, interest, repairs and maintenance.

Investors are also entitled to a non-cash deduction for the wear and tear which has occurred on the structure of the building and the assets contained within the property over time. This deduction is known as property depreciation.

John and Lisa’s scenario *

John currently does not own an investment property though he would like to. He believes the cost of owning an investment property is not within his current budget.

From his $85,000 salary, he pays $20,707 in taxes after he claims basic expenses such as a clothing allowance, donations and general accounting fees.

Lisa earns the exact same salary of $85,000. However, she saved a deposit and purchased a three bedroom rental property for $600,000 just over one year ago. Her property is rented at $545 per week, a total rental income of $28,340 per annum. The income earned from Lisa’s investment property is also taxable, therefore her total combined income equals $113,340.

In addition to the same basic expenses John claimed, Lisa is able to claim deductions for expenses involved in holding the property, including management fees, insurance, rates, interest, repairs and maintenance. These expenses for a typical three bedroom property would amount to around $39,067. Lisa also spoke with BMT Tax Depreciation and obtained a depreciation schedule which showed she could claim an extra $14,200 in depreciation deductions in the first financial year.

The following table compares the pair and shows their before and after tax situations:


(no investment property)


(owns an investment property)

Gross salary $85,000 Gross salary $85,000
Other deductible cash expenses (eg. clothing allowance, donations, basic accounting fees) $1,000 Other deductible cash expenses (eg. clothing allowance, donations, basic accounting fees) $1,000
Property income $0 Property income ($545 x 52 weeks) $28,340
Property expenses $0 Property expenses $39,067
Depreciation deductions (first full financial year) $0 Depreciation deductions (first full financial year) $14,200
Total income $85,000 Total income $113,340
Total deductible expenses $1,000 Total deductible expenses (Other deductible expenses + property expenses + depreciation) $54,267
Taxable income $84,000 Taxable income $59,073
Tax payable (including Medicare levy) $20,707 Tax payable (including Medicare levy and low income tax offset) $11,814
Take home income (Total income – cash expenses – property expenses - tax payable) $63,293 Take home income (Total income – cash expenses – property expenses - tax payable) $61,459

Assumptions and Disclaimer

The depreciation deductions in Lisa’s scenario have been calculated using the diminishing value method and are based on the first financial year of ownership. This is a generic example only. Every person’s position is different.

As you can see, John’s take home income after he pays $20,707 in taxes is $63,293. Although Lisa earns the same take home wage and is in a similar financial position to John, her income producing property also entitles her to claim a total of $53,267 in deductible expenses including depreciation. This further reduces her taxable income to just $59,073 making her income tax payable $11,814.

By maximising the deductions she can claim due to holding her property and claiming depreciation, Lisa’s take home income is only a difference of $1,834 per year. Therefore, her property is costing $35 per week to own after tax.

Investors thinking of purchasing a property should always obtain expert advice from a specialist Quantity Surveyor on the depreciation deductions that will be available to them once they purchase a property.

This article is not intended to provide financial or taxation advice and should not be relied upon for that purpose. Investors should speak with XO Accounting to get a complete before and after picture of their individual tax situation based on their individual circumstances.

* Source BMT Quantity Surveyors

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