One question that often arises among savvy investors looking to maximize their tax returns is whether the fees paid to a buyer’s agent can be tax deductible. The answer to this question depends on whether you are purchasing a home or an investment property. Here’s what you need to know.
Buying a Home
Unfortunately, fees paid to a buyer’s agent for purchasing a home you intend to live in are not tax deductible. The Australian Tax Office (ATO) states that only expenses incurred in earning assessable income can be deducted. Since a property you reside in does not generate income, the fees cannot be claimed as a tax deduction.
Buying an Investment Property
If you hire a buyer’s agent to assist you with purchasing an investment property, their fees may not be immediately tax deductible against your income tax. However, they can be included in the cost base for capital gains tax (CGT) purposes. This means that when you eventually sell your investment property, the fees charged by the buyer’s agent will reduce the amount of CGT you have to pay.
Selecting a Property Manager
The ATO considers the service provided by a buyer’s agent in assisting with the selection of a property manager to be complimentary. Therefore, no portion of the agent’s fees is tax deductible against income tax. Buyer’s agents typically do not charge separately for this service and do not itemize the time spent on their invoice. Additionally, the buyer’s agent’s fees are generally based on the property they are sourcing, regardless of whether it is an investment property or an owner-occupied property. Hence, there is no additional cost associated with this service for an investor.
For the fee related to selecting a property manager to be tax deductible, the buyer’s agent would need to charge a specific fee based on the time spent or itemize the amount on the invoice. If such circumstances occur, there may be a stronger argument for this portion of the fee to be tax deductible as it is directly associated with earning assessable income, specifically rental income.
It’s worth noting that if you borrowed money to pay for the buyer’s agent fees, the interest charged on that loan can be tax deductible.
Other Deductible Expenses for Investment Properties
Apart from buyer’s agent fees, there are other expenses associated with investment properties that can potentially be claimed as tax deductions to reduce the amount of tax payable. Here are a few examples:
- Depreciating Assets: Items such as fridges, washing machines, curtains, and building materials that depreciate over time can be included as deductions. To ensure accurate depreciation calculations, it is advisable to consult a quantity surveyor who can provide a depreciation schedule.
- Mortgage Interest: If you have borrowed money to finance your investment property or to purchase assets for the property, the interest paid on the loan can be claimed as a tax deduction. However, it’s important to note that if you reside in the property, you cannot claim the interest to reduce your tax liability.
- Renovations and Improvements: Expenses incurred for renovating, constructing, or making improvements to your investment property can be claimed as tax deductions. These expenses can contribute to maximizing your tax deductions, but it’s recommended to seek advice from an accountant or financial advisor to ensure compliance and optimize deductions.
Buyer’s Agent Fee Structure
Buyer’s agent fees are typically calculated as a percentage of the purchase price of the property, rather than based on the time spent providing specific services. The fees charged by buyer’s agents are generally consistent for both residential and investment property buyers, regardless of whether the selection of a property manager is required.
ATO Interpretive Decision
The ATO’s decision regarding the deductibility of buyer’s agent fees is based on specific circumstances and evidence. While fees may not be tax deductible, they can still form part of the capital gains tax cost base of the property.
In summary, it is crucial to understand the tax deductibility of buyer’s agent fees based on the type of property you are purchasing. While fees for buying a home to live in are not tax deductible, fees for investment properties may contribute to reducing capital gains tax in the future. To make informed decisions, it’s advisable to consult with a qualified tax professional who can consider your individual circumstances and provide personalized advice.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.