Investment Property Cash Expenses & Tax Deductions
This guide gives an overview of the cash expenses and tax deductions you can expect each year from owning an investment property. Expenses from borrowing are not included here.
Each one of these areas is catered for in our Free Downloadable Investment Calculators. You can find further investment property information in our Investment Property Guides area and find help with using our calculators in the Help & Support Area.
You can also get a better understanding of the tax deductions for each one of these areas by reading the Rental Properties Guide.
Accounting costs are those associated with paying an accountant to prepare any tax returns for the property and manage your financial statements.
Accountants will charge different amounts depending on their own individual rates and the complexity of the investment.
For a fairly simple annual tax return that includes an investment property an accountant may charge between $500 to $2,000.
Accounting expenses may also include the cost of preparing a depreciation schedule.
Of course if you handle all the tax aspects of the property yourself then you won’t pay any accounting expenses.
Many property investors pay a property agent to manage their properties for them. The agent will organize tenants, ensure they pay their rent, and may manage any number of other aspects to do with running the property as an investment.
These expenses will vary depending on the agent, the property, and the work required. The agent will generally take a percentage of the rental income in exchange for managing the property. This percentage taken may be anywhere between 2% to 6%.
Sandra hires a property agent to manage her investment property. The agent takes care of finding the tenants and managing them. In exchange for offering this service the agent takes a commission of 3% of all the rental income received.
As the property pays $500 a week in rent the agent will take 3% x $500 = $15 in commission.
Body Corporate Fees / Strata
If purchasing a unit or apartment that is part of a block of units or an apartment development you will most likely have to pay body corporate fees. These fees are charged by those who manage the development and are charged to cover expenses incurred in maintaining the overall development. This could include things like maintaining elevators, parking facilities, swimming pools, or any number of other expenses.
This amount will vary depending on the facilities / amenities of the development and for a new development may range between $500-$1,500 a year.
Council rates are administered by and charged by local councils. They have revenue requirements in order to fund their expenses such as garbage collection.
The rate is different for each local council. Some administer the fees based on land value and others on property value and land value. How local councils determine the rates they charge changes almost every year and varies wildly depending on the council
To provide an idea of how much you can expect to pay in council fees the Hills district council in Sydney charges roughly 0.3% of the land value in council rates.
You can read more about council rates in our council rates guide
Repairs and Maintenance
These are expenses you expect to pay each year in maintaining the investment property.
From the ATO:
Expenditure for repairs you make to the property may be deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.
Repairs generally involve a replacement or renewal of a worn out or broken part – for example, replacing some guttering damaged in a storm or part of a fence that was damaged by a falling tree branch.
However, the following expenses are capital, or of a capital nature, and are not deductible:
- replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
- improvements, renovations, extensions and alterations, and
- initial repairs – for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.
Electricity & Water Charges
Please note that you should not enter these details in the calculator if you are not the person who pays them. If the tenant pays you are not entitled to a tax deduction and it will also not affect your cash flow.
These will vary depending on the electricity and water usage by the tenants.
Expected electricity charges for a property
For a 2 bedroom apartment with 2 occupants on Sydney’s North Shore you can expect to pay roughly $1,000 a year in electricity charges.
Expected water charges for a property
Water charges will differ depending on the city or town the property is in. Water charges are divided into a connection fee that is charged for being connected to the water system and a usage fee that is charged based on usage.
Water usage will depend on factors such as;
- whether there is a garden
- how many loads of washing are done
- the length of showers taken
- water efficiency of showers, washing machines etc.
There is an excellent water usage calculator that will calculate how many litres per day you can expect to use here http://www.savewater.com.au/powerwater/calculator.
Sydney water also provides a water usage calculator but it only calculates the amount based on the known usage per day. http://www.sydneywater.com.au/CustomerServices/WaterUsageCalculator/index.cfm
Residential properties can expect usage of 100-400 litres a day which will result in a water charge of between roughly $100-$300 a year.
Connection Fee Charge
From Sydney Water:
“For the period 1 July 2010 - 30 September 2010, the quarterly water service charge for residential properties will be $31.33 and then $31.30 each quarter from 1 October 2010 until 30 June 2011.”
Water Usage Charge
From Sydney Water:
“All metered properties, and properties with a common or shared meter, pay the standard water usage price for water used per quarter. Most water meters are read once every quarter.
The standard water use price is $2.012 per kilolitre (kL) - 1 kL is equal to 1,000 litres.”
Bank Charges On Loan
Bank charges on an investment loan will depend on the bank and the package you sign on with.
The following is a small collection of bank charges by various banks:
- Standard Variable Rate Home / Investment Home Loan = monthly loan service fee $8
- Fixed Rate Home / Investment Home Loan = The monthly loan service fee is $8
- Standard Variable Rate Home / Investment Home Loan = $5 p. month
- ANZ Fixed Rate Home Loan = Loan administration charge - $10 per month (applies during fixed interest rate period)
While these bank charges may seem small they can really start to add up over the life of the loan. $8 a month is equivalent to $96 dollars a year meaning over the course of a 30 year loan you are likely to have paid close to $3,000 just in bank charges!
These expenses are not to be confused with the upfront borrowing expenses involved in securing a loan or the loan approval fee charged by banks. These are not deductible every year and are not charged every year. You can read more about upfront borrowing expenses in our Property Borrowing Costs & Tax Deductions Guide
Insurance can be purchased to protect your investment properties. Insurance cover is tax deductible and can protect you against circumstances including loss of rent, rent default, theft by a tenant, building damage and public liability claims.
Insurance on building, contents, public liability and landlord’s insurance which covers rent defaults is deductible.
“It is up to your tenants to take out their own contents insurance, but you as a landlord will need to have building and landlord insurance. You may also want to consider liability insurance to protect yourself should your tenants damage the investment property or themselves.
Landlord insurance covers malicious or accidental damage by a tenant, legal liabilities, loss of rental income ... the list of hazards facing landlords is almost endless, and, not surprisingly, many choose to hand the day-to-day responsibility for their investment properties to real estate agents or property managers. Any fees paid to a property manager are tax deductible and can be claimed in your annual tax return as an expense of the property.”
How much is insurance for an investment property?
Landlord insurance varies wildly and depends on:
- the insurer
- your past insurance history
- including previous insurers and past claims
- your years of being a landlord and whether it is yourself or an agent that manages the property.
- The property area
- The property type
- The security features for the property
- The rental agreement
- Other rental properties you hold
There are a wide variety of online calculators from insurance providers that will provide you with a quote for landlords insurance including two of the largest Australian insurers AAMI and GIO:
For a first time landlord purchasing an apartment and no past insurance claims you can expect to pay between $300-$700 a year in Landlords insurance.
What is land tax?
Land tax is a tax levied on the owners of land each year. In general, your principal place of residence (your home) or land used for primary production (a farm) is exempt from land tax. You may be liable for land tax if you own or part-own:
- vacant land, including vacant rural land
- land where a house, residential unit or flat has been built
- a holiday home
- investment properties
- company title units
- residential, commercial or industrial units, including car spaces
- commercial properties, including factories, shops and warehouses
- land leased from state or local government.
How much is land tax?
Land tax is a state administered tax that is different for each state. You can use our Free Online Land Tax Calculator to calculate land tax for any state.
You can also find information relating to land tax for each individual state below: