Tax deductions are an investor's best friend.

Top 5 tax deductions for property investors

Each year, a certain percentage of our income, whether personal or business, goes to the Australian government in taxes. According to the Australian Taxation Office (ATO), over the 2013-14 financial year, it took in over $163 billion in taxes from individuals – a lot of money by any stretch of the imagination. 

You're probably thinking that it would sure be nice to keep a little more of that money for yourself. As luck would have it, if you've ever hired a buyers' agent to find you an investment property, you can. There are a host of tax deductions available to property investors that can make a significant dent in your tax bill and leave you smiling at the end of it. Here we highlight some of the main ones. 

1. Interest expenses

One of the biggest costs that goes into owning any type of property is paying back the interest on your mortgage, particularly in expensive cities like Sydney and Melbourne. A 5 per cent interest rate might not sound like much, but when you consider that the CoreLogic RP Data Home Value index puts the median dwelling price in the two capitals at $935,250 and $755,510 respectively, it adds up. 

Fortunately, this interest can be fully claimed back as a tax deduction, potentially netting you some serious savings. Just look at the ATO's deduction figures for 2012-13: There were more than 1.5 million rental interest deductions claimed for a total of over $22 billion. That's an average of a little over $14,000 per investor. 

Remember that you can also claim interest on any loan used to buy assets like a fridge or washing machine for the property, as well as loans used for renovations or repairs. If you decide to start living in your property, however, you'll no longer be able to claim this. 

2. Agent fees and commissions

One of the first steps to successfully investing in property is finding a good property agent who will look after your best interests. They negotiate on your behalf, organise property inspections, carry out appraisals and, of course, discover the property you will purchase in the first place. 

While some people might be concerned about cost and want to pinch every penny, the good thing is that if you're using a buyers' agent to buy a rental property, their fee or commission can later be deducted. That way, you can feel free to make use of their services without any compunction. Remember, too, that if you hire an investment property manager to look after your rental in your stead, their fees can also be deducted from your tax bill. 

3. Capital works

It's no secret that Australians love to do up their properties, whether by adding a fresh paint job to the interior, modernising the kitchen or even adding an extra feature like a veranda. In fact, according to the Westpac Renovation Report released in November 2014, home renovations in the country have increased 147 per cent since 2010. The same report found that 90 per cent of Australians believed making improvements was a good way to push up the value of a home.

Of course, making renovations doesn't come cheap. It's therefore heartening to know that all capital works expenses – such as for altering or constructing a building, or making improvements to surrounding property – is totally deductible. In fact, in 2012-13, ATO figures show nearly 900,000 people received a total of $2.4 billion worth of deductions for capital works, or an average of $2,844 per person.

4. Council rates

Council rates can be a pesky expense. Even though you've purchased the property and are busy paying off the mortgage, you continue to have to pay the council a certain percentage of the property's value. And the rate itself never stays the same. 

For instance, for residential properties in Melbourne, the rate has steadily fallen from 6.4 cents in 2000-01 on a property's Net Annual Value – which is 5 per cent of the property's value – to 4.2 cents in 2015-16. While much lower, this can still be a fair chunk of change. Same goes for Sydney. Just this year, the Sydney Morning Herald reported in January 27 that 22 councils in the New South Wales capital had increased their rates. It would be nice to be able to offset this rise by claiming it as a tax deduction. 

5. Depreciating assets

Claiming the declining value of assets is one of the most common tax deductions claimed by property investors. All items – such as the dishwasher, fridge, carpet, curtains and even the building materials – suffer wear and tear over time, falling in value. You can use this natural process to reduce your tax bill. 

In order to do so, you'll have to hire a quantity surveyor, who will draw up a depreciation schedule for your property. It might also be worthwhile consulting a financial advisor or accountant to make sure you get the most out of your depreciating assets. 

This is only a small sample of the tax deductions that are available to investors. Consider the options available when you hire a buyers' agent to find an investment property.

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