How to do Tax Deductions for an Investment Property in NSW, Australia

Last year I bought a house. Recently, I've been doing my tax. It is much more complex this year with the property, but there are a lot more deductions. Here's some tips:

Renting a out part of your property
If you rent some of your property, you are eligible for tax deductions for a proportion of your expenses. This proportion is based on the floor area that is rented, compared with the floor area which is not rented. Make sure you include common areas in your calculation.

Keep receipts and record all expenses
They then need to be classified into areas such as:

• Interest on loan
• Advertising
• Insurance
• Rates
• Repairs
• Postage
• Cleaning
• Garden
• Borrowing expenses
• Legal Expenses
  
• Depreciation
• Capital Works

Most of these are straight forward, and immediate write offs in the year they are incurred.
I'll go into more detail on the complex ones below.

Borrowing Expenses
Generally, you will need to spread these over 5 years, or the length of your loan, whichever is shorter. In most cases, this will mean you'll tax deduct 1/5 of them each year for the first 5 years of your loan. They include things like government stamp duty on the loan and bank charges.

Legal Costs
Unfortunately, these do not include the cost of legal fees in acquiring your property. They are for when you need to fight with tenants in court and similar. Hopefully you won't have any of these.

Depreciation and Capital Works
This is the most complex area. First, download the Rental Properties Guide 06 (NAT1729-06) from the ATO. This document is invaluable. I'd recommend you at least skim read it.

Capital Works
Okay, now, if your house has been built or had any significant renovations since 1979, you may well have capital works deductions. The conditions on these vary. Have at look at the guide mentioned above, page 23 of the PDF. In most cases, you will be able to claim construction costs at 2.5% for 40 years. If there was a couple of hundred thousand dollars of construction costs, 2.5% could be quite a bit of money every year. If you know the cost of the construction, this is easy to calculate. If not, you will need to get this estimated - you can't do this yourself. I used Depreciator. They employ quantity surveyors and meet ATO requirements. I was quite happy with them - see my post on the Somersoft investment forum for more details. They also estimate costs of assets such as hot water systems, stoves, blinds etc.

Deductions
You need to classify all your assets according to their cost and depreciate accordingly:

• $1-300: write off straight away in the current tax year
• $301-1000: put in low value pool (deduct at 18.5% for the first year when adding to the pool, 37% for assets already in the pool)
• $1001 or more: depreciate with straight line or curved line methods over effective life set out by ATO. You can find these in the rental guide from the ATO mentioned above.
  

What is a asset (can be depreciated) and what is a capital work
There is a reasonably arbitrary seeming classification of items between capital works and deductions. A hot water system, for example, is a depreciable asset but a kitchen cupboard is a capital work. Check all your items with the rental guide mentioned above. If an item is an asset, you can estimate its market value, and you can depreciate it over the effective life in the guide. If it is a capital work, then you cannot depreciate it. It is part of construction costs - see above section on capital works for more details on claiming these.

Disclaimer
I'm not a tax professional. This post is my personal opinion and interpretation. No responsibility taken for an errors or omissions. Use at your own risk.