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Rental Property Tax Deductions

1 May 2011 |

Investing in property can bring many rewards. Where gearing is involved the losses can help reduce income tax. This benefit can come at the cost of a significant drain on cash flow depending on the tax rate of the individual and what type of property has been purchased.

The choices for investing in direct property are between buying a new property or one that is established, and either commercial premises or a domestic property. Each of the choices offers different opportunities and tax benefits.

The impact on an investor’s cash flow of deductible costs depends on their type. There are those costs that are deductible in the year they are paid such as rates and agents fees. The other costs are those where a portion can be deductible in the year they are paid. Furniture fixtures and fittings are an example of costs that will not be fully deductible in the year they are purchased but will be written off over their estimated useful life.

There is one cost that depending on when the property was constructed that delivers a tax deduction over the period it is owned and produces income. This is the cost of the building itself.

There have been many changes to the way construction costs can be written off over the years. These changes have resulted in different annual write off rates that depend on the date construction commenced and the type of property. In all cases the rate of write off is done under the prime cost or straight line depreciation method that results in an annual amount that does not change each year.

For commercial properties such as shops, offices and factories where construction commenced between 21 July 1982 and 19 July 1985 the annual write off is 2.5 per cent. For those properties and income producing residential properties where construction commenced between 19 July 1985 and 15 September 1987 the annual write off is 4 per cent.

For most income producing properties where construction commenced after 15 September 1987 the annual write off has been unchanged at 2.5 per cent. The exceptions to this are manufacturing properties and short term traveller accommodation. Both of these types of properties can be written off at 4 per cent where construction commenced after 26 February 1992.

The ability to claim the tax deduction for construction costs is not limited to who had it built. The annual tax deduction passes from one owner to the next as long as the property is being used to produce assessable income.

In some cases the annual tax deductible amount will be available from the vendor of the property. This amount is often a selling point for properties purchased from developers. The purchaser is often given a depreciation schedule that details all costs that can be written off split into fixtures and fittings and construction costs.

In the cases where the vendor does not provide the details of the annual deductible amounts this information can still be obtained. There are quantity surveyors in every Australian capital city that specialise in providing this information. Investors wanting to maximise their annual property deductions realise the cost of getting a quantity surveyor’s depreciation report is often outweighed by the increased tax deduction and refund.

If you have a rental property and have not had a depreciation schedule prepared for it all is not lost. You can get a quantity surveyor to prepare one and, as well as including the tax deduction in your current tax return, you can also go back and increase the tax deduction for up to two years.


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