What tax deductions are available for homeowners?
Whether you're a homeowner or property investor, owning real estate can have its benefits come tax time. There are a lot of expenses that homeowners and property investors need to shoulder in the ongoing use and maintenance of their home.
So, whether you have a home office, rent out a room or an entire house, there are some tax deductions you're entitled to. So, if you're looking to ease the pain of tax time, it pays to be across what you can and can't claim.
Tax deductions for owner-occupied properties
According to the Australian Taxation Office (ATO), if you own your home and live in it without earning an income from it, you're not eligible for any tax deductions. But, as working from home became the new norm during 2020, you may qualify for more tax benefits than you think.
The home office
If you're using a room or another part of your home, such as a granny flat, for running a business, you can claim a tax deduction on the costs of running that business. Deductions can include interest on your home loan, home insurance and maintenance costs.
This is calculated on your home office floor space compared to the property's floor space as a whole. Chat with your accountant about the exact amount you will be able to deduct. It's important to note that you will need to factor in that the portion you claim as a home office could potentially attract Capital Gains Tax (CGT) if you sell the house.
Running costs and depreciating assets
You can also claim the running costs with a home office, including utilities, mobile phone, internet, landline, electricity (beyond what you would use if you weren't working from home), cleaning and office supplies. You can also claim depreciating assets – office desks and chairs, lighting fixtures, curtains, carpet, heating and cooling systems, computer equipment etc. Having said that, you can usually only claim the decline in value for items over $300, not the total amount.
For those working from home temporarily during the Covid-19 pandemic, you may temporarily be eligible for similar tax benefits. Speak to your accountant and the ATO about what tax benefits you're entitled to.
Renting out a room
When you're an owner-occupier and rent out a room within your home, you can potentially claim the same tax deductions as a property investor. The ATO treats your room the same way it would any investment property. How much you would be able to claim is calculated on the floor space of the rental room compared to the property's floor space as a whole. You will only be able to claim for the periods when the room is being rented, and when you sell, you could potentially attract CGT for the period the room was rented.
Tax deductions for investment property owners
When the end of the financial year rolls around, property investors qualify for several tax deductions as long as they have earned rental income from the property and only during the rented period. Here is what you can claim as a property investor.
For many, a tax-saving strategy is negative gearing, meaning the rent doesn't fully cover the costs the property investor incurred on the property. These costs could be home loan interest paid, maintenance, agent and advertising fees, and expenses on depreciating assets like appliances or furniture. The idea is that you take a short-term loss on your investment property in exchange for long-term capital growth and beneficial tax treatment.
Property investors may qualify for tax breaks on any capital works undertaken before renting out the property and even the costs of constructing the property. The ATO states that any capital works refer to any significant construction or renovation of the property or any fixed installation attached to it. Many factors determine the tax deduction rate and duration, such as the property's age, type of renovation or construction and period of renting out the property.
Owning an investment property also means that you're entitled to claim the decline in value of the building's structure and permanent fixtures (ovens, carpet, light fixtures etc.). This tax deduction is significant for newly built properties because fixtures and fittings are valued higher and lose value quicker.
Maintenance and home improvements
One of the benefits of being a property investor is claiming all your repairs and maintenance, including plumbing, electrical, and general up-keep of the property, such as painting and new flooring. Money spent on renovations and extensions generally counts towards capital works, so the key is to spread the deductions over 25-40 years.
You can dive deeper into what tax deductions you're entitled to as an owner-occupier and property investor by speaking with your accountant or jumping over to the ATO website.