How to Reduce Your Taxes as Property Investor

It's tax time, and it's probably the most unsexy thing to be doing right now.

But it's very important you pay attention because the Australian Taxation Office (ATO) is targeting a few things you need to be aware of, especially for you as a property investor.

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I'm going to share with you some ways you can reduce your taxes, and if you're a property investor, some of the things that you can claim on that you didn't think you could.

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Now, I may look like an accountant, but I definitely am not one. One thing is certain, a good accountant is super underrated. I haven't done my personal tax returns for almost 11 years. I've always outsourced it to an accountant, and they take care of everything.

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You might be someone who does your own tax returns.

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You might have one or two properties and still choose to do it yourself, and if you do have an accountant and they end up missing out on something, because you were reading this blog, then that could also help.

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I'm going to break down everything you can claim as a tax deduction on your investment property.

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At the end of this blog, I'll also share with you a couple of tips around what you should pay attention to this year as the Australian Taxation Office (ATO) is targeting you. That can be scary, but if you stick to the rules, then you should be fine.

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Agent Fees

Investment buyers agent fees…this could be property management fees as well as the agency fees.

So when you've got an investment property and you decide you're going to rent the property, it needs to be advertised. Sometimes, when you need to reissue a new lease, you'll be charged a lease preparation fee as well.

All of these expenses can be claimed against your income on that property investment. Everything from brochures to the sign that goes outside of the house, as well as the property management fees, you get charged every month.

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Strata Fees 

This applies to a property that is strata titled. If you have a Torrens title, most likely a standalone home, you probably don't have strata fees.

But if you have a unit, a townhouse, or a strata title property, you will then have to pay strata fees and that again is something you can claim against your income.

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Loan Repayments

This is probably your biggest expense for the year.

You can't claim the principal portion. It is only interest, which is the cost of borrowing, that can be claimed.

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Council Rates and Taxes

Most likely, when you have an investment property, you're going to have to pay for:

• Council rates; as well as
• Water rates.

Now, a really good hack here is that if you find a really good property manager, you're able to manage this so easily. I do this myself across all of my investment properties. I get the property manager to pay for the water rates and the insurances when they're due.

This allows me to not have to worry about missing a payment because I didn't check my mail or the mail got lost, and it often means that the property manager can just pay that quarterly out of the rental income. So it's something I don't have to worry about, and it's one less thing I do have to worry about.

Personally, that admin portion doesn't cost anything extra, and it might be different for you.

However, when you do have a sizable portfolio, you don't want to be spending an extra five or 10 minutes here on each property because imagine, you have 10 properties or you have 20 properties—this number starts adding up, and the chance of you making a mistake is highly likely. So when you're dealing with numbers this big, you definitely want to outsource it.

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Repair or Renovations

This could be as low as you fixing a tap, to all the way up to you, going and renovating the entire property—the bathroom, the kitchen, and everything in between.

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Insurance

I hope that if you have an investment property, you have insurance.

I'm not just talking about building insurance. I'm talking about landlord insurance.

Again, I can't give you insurance advice, but it seems like it's pretty common sense at this point, and you don't have to go too far to hear about the horror stories of some tenant blowing up the place. (actually, I don't think I've ever heard of someone blowing up the place…hahaha!)

But there are some crazy things that can happen to your property, and yes, there might be less than a 1% chance that that could happen, but you definitely want to have insurance and the best part is that you can claim that against your income as well.

Quantity Surveyor

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Now, most of you are scratching your heads saying: What is that? I've heard the term but I'm not sure what that is.

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Well, I'm going to break it down for you because this is one of those things that I got taught after my first couple of properties, and I wish I knew from the beginning.

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We tell every single client at the buyer agency that purchases with us that you need to get a Quantity Surveyor. If you need a contact that is trustworthy and can do an amazing job for you, definitely book a free discovery call with my Search Property team.

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Now, speaking of quantity surveyors, I trust these guys, and they take care of all of my own personal properties as well as every property that the clients buy under our agency.

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What a quantity surveyor will do is they essentially will go in and see how old the property is and, based on the age of the property and the cost of building it, they're going to be able to depreciate the building cost.

Now, before you go any further and get confused, we have always been taught that: land appreciates, buildings depreciate.

This is more of an accounting figure. So when you actually go in and say: Oh well, the house is worth a lot less, technically, the bricks are worth less because they're older and things like that.

However, I've seen a lot of people get caught out where they just buy a piece of land and say: “Well, land appreciates,” and then suddenly find themselves not making any money at all.

A quantity surveyor could cost you a couple of hundred bucks. They create this depreciation schedule, and a good rule of thumb is: if your property is less than 40 years old, you'll be able to claim some of it in depreciation.

Now, how does this work similar to a business?

As part of your tax return, they'll say: Okay, well, although you've made $10,000 in this property because it's positively geared, your building is actually depreciating by $3,000 a year.

You might see that and say: Well, that's a pretty lousy deal.

However, it's actually really good for your accounting because what they will do is they'll say: $10,000 is the income minus the depreciation, which is $3,000, and now we're only going to tax you on $7,000.

So it's a really good hack, and it's so worth it. I just wish more people knew about doing this.

Now, outside of having an investment property and being able to go and reduce your taxes by claiming all of these things, there's one other thing that you need to consider—it’s that you can only claim this on an income-generating investment property.

So if you go out there and just buy a piece of land, if it's not generating you an income, it's technically not going to qualify for these deductions. (Again, you're going to have to speak to an accountant. I'm just some guy in a black T-shirt, so don't hold it against me.)

However, outside of investment properties, there are some other ways that you can go and reduce your taxes this year: 

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Number One: Salary Sacrifice.

This is something you may or may not have heard about.

Salary sacrificing is essentially saying: You're getting paid by your employer, and what happens is you only get the net amount in your account.

You'll see your pay slip, and you'll see the gross income that you should be getting paid but you're not because the government loves you and they take their tax. So they take their cut and then you're left with the net amount. That's what gets transferred into your bank account.

However, if you were to go down the path of salary sacrificing, what you could do is reduce your pre-tax income.

For example If you were getting paid $10,000 a month, and you decided: I'm going to salary sacrifice $1,000 per month towards my super.

That would then be $10,000 minus $1,000, which now means you're only going to get taxed on $9,000.

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This is very advantageous, especially if you do this over time, and it compounds in your super account.

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Number two: Optimise your capital gains and losses

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Another way in which you can actually reduce your taxes legally is to optimise your capital gains and losses.

On any investment, you have to pay capital gains tax or you would qualify for a capital gains loss.

This is outside of your principal place of residence. You don't qualify for capital gains, which also means you don't get taxed on that amount. This is why so many people have built so much wealth by having bought their property and have it go up in value. When they sell, they pay zero tax.

The counter to this is if you buy the wrong property, or you overstretch yourself and over leverage yourself, you could miss out on so much more gains elsewhere, and you're not diversified. So that's something you need to take with a grain of salt.

Now, what I mean by optimising capital gains and losses is: If I decide to sell within 12 months of me purchasing that asset, in most cases, I have to pay 50% of my profits in capital gains.

A lot of people recently in the last couple of years have been caught out with this when it comes to crypto because…hey! Nobody knows the blockchain and how crypto works, but everything's linked.

So, when people were selling and buying and selling and buying, they didn't realise that they were racking up a really nice tax bill.

The same thing would happen when it comes to flipping properties.

If you decide to buy something today, and you bought it under your own name, and you decide: Okay, I'm going to do a reno job, and I'm going to flip it, in 6 months' time, let's say, you make $40,000 after all costs, you're going to get taxed almost 50% of that number.

One way to avoid that is if you were to optimise it and hold an asset for longer than 12 months. At that point, you get a capital gains discount and this would vary on how much you can save, depending on your tax bracket.

Now the tax brackets are about to change, so I'm not going to leave any information here. In case you're reading this later, a simple Google search will allow you to find out what tax bracket you fall into, and there are also capital gains tax calculators (that was a mouthful) on the internet that can help you figure this out.

Another thing to consider is before June 30th, it would calculate in that financial tax year and if it's on July 1st, that would mean that tax would not be calculated for another 12 months as that is the new financial year.

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Final Thoughts

Now, my final point relates to how people have now gone in and started working from home.

If you are working from home, you can claim a lot of things that a couple of years ago you probably wouldn't have even thought of.

This is why having the right accountant makes so much sense because they can do all the thinking for you, and you can just go and use blogs like this to cross-reference in case they're a bit of a dud. 

If they're a bit of a dud, you should probably get rid of them anyway.

Claiming work-from-home expenses can be really fruitful, especially if you've gone out and set up a whole office at home and have a dedicated space. 

I hope you guys have enjoyed this article and hope you've taken a tip or two when it comes to tax returns and how you can optimise your tax and legally pay less tax.

More importantly, if you do enjoy this sort of content, you should continue reading my blogs as well as subscribe to my YouTube channel because I talk about property and about growing your wealth and that is so important, especially now that it's become so much harder to do.

I'll catch you guys in the next one.

Thanks, guys!

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