Owner occupied home loan tax deductions: What's available?

Many Aussies buy property as an investment and rent it out, while others may use part of their home as an office space to run their business. You may know that you’ll need to pay tax on the rent or income you earn. You may not know you can claim tax deductions on some of the expenses incurred in renting out your home or operating your business. If you buy new furniture or electrical equipment for your investment property or your home office, any depreciation or loss in value of these purchases may be tax-deductible. There is also the possibility of claiming a tax benefit on the interest you pay on the mortgage held on the property. 

Which tax deductions are available for investment property owners?

People who invest in property in Australia may qualify for several tax deductions as long as they earn rent from the property. Typically, you can only get the tax deductions for the period the property is rented out. So if there is a period you live in the property, there are no tax deductions available on that period.

One common tax-saving strategy is the practice of negative gearing. This refers to situations where the homeowner’s rent doesn’t fully cover the costs you incurred for the property. These costs may include:

1. The home loan interest paid by the homeowner
2. Expenses associated with maintaining the property 
3. Rental-related expenses like the cost of publishing property advertisements  and agent fees
4. Expenses on depreciating assets

While the homeowner may suffer moderate losses initially, the tax benefits and long-term increase in the property’s value often more than compensate for any losses. Homeowners can also claim a tax deduction for any loss in value of assets like appliances or furniture in the rental property or the part of the home that’s rented out. 

Homeowners may also qualify for tax breaks on any capital works undertaken before renting out the property and even on the costs of constructing the property. According to the ATO, capital works refer to any significant construction or renovation of the property or any fixed installation attached to it. The tax deduction rate and the duration for which the deduction is available depends on the property’s age and the type of construction or renovation. When calculating the tax deduction, the period of renting out the property is also a factor. For instance, if the property was genuinely rented out for only six months of the financial year, the tax deduction available would be half the amount available for the full year. A similar calculation applies when renting out part of the property.

Are there tax deductions for owner-occupied properties?

If you own your home and live in it without making renting it out or earning an income from it, you’re not eligible for any tax deductions. However, suppose you’re using a room or another part of your home for running a business. In that case, you can claim a tax deduction on the costs incurred in operating the business. Most of the available tax deductions don’t require you to define a specific work area within your home. These deductions include the cost of utilities, mobile phone, home phone and internet but don’t include your home loan interest. If you can prove that you’ve set up a workspace within your home, you can also claim tax deductions on depreciating assets. These assets can include office desks and chairs, telephones, lighting fixtures, and heating or cooling equipment.

To qualify for the tax deductions, you may also have to demonstrate that your home doubles up partially as your workspace or acts as a storage space for work tools and equipment. For instance, a doctor using the study located within their home as a clinic or a home decorator whose accessories are kept at their residence could qualify for these tax deductions. You should consider checking the ATO’s list of possible home-based businesses to see if your business qualifies for tax deductions. Corporate employees who have been working from home due to the pandemic may be eligible for similar tax deductions, but only temporarily.

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