If you rent out your property or it is genuinely available for rent, you can claim deductions for most of the expenses you incur during these periods.
What expenses can you claim?
The most common rental property tax deductions are:
- Council rates
- Land tax
- Water rates (excluding usage)
- Body corporate fees
- Borrowing expenses – generally claimable over 5 years
- Agent fees, including monthly management fees
- Advertising for tenants and leasing fees
- Loan interest
- Repairs & maintenance
- Capital Works
- Quantity Surveyor fees for preparation tax depreciation and capital works schedule
- Legal expenses for preparation of lease documents or other tenant related matters
- Security patrol fees.
Note that the following expenses are not claimable (unless you are carrying on a business or an excluded entity):
- the cost of second-hand depreciating assets
- travel expenses relating to your residential rental property.
Can all my rental property expenses be claimed?
If any of the following apply you may need to apportion your rental property expenses and only claim the amount that relates to your income-producing activities:
- your property is only genuinely available for rent for part of the year
- you use your property for personal purposes for part of the year
- you only use part of your property to earn rent
- you rent your property at non-commercial rates (less than market rates)
- you partially use your investment loan for personal purposes.
The apportionment of expenses should be on a reasonable basis.
Genuinely available for rent
Your property must be rented or genuinely available for rent to claim a tax deduction for your rental property expenses.
A property is considered to be genuinely available for rent where:
- there is a genuine effort to advertise the property to give it broad exposure to possible tenants, and
- there are not unreasonable or restrictive conditions which make it unlikely for a tenant to rent the property, as this may indicate that you don’t have a genuine intention to earn rental income from the property or you are using or reserving it for personal use.
What can you claim?
You can claim interest expenses on a loan that you use to:
- purchase a rental property
- purchase a depreciating asset for the rental property (for example, a new air conditioner)
- make repairs to the rental property (for example, roof repairs due to storm damage)
- finance renovations to the rental property.
TIP: You may be eligible to claim a deduction for interest expenses that you prepay for up to 12 months in advance.
What can’t you claim?
You cannot claim interest:
- for periods you use the property for private purposes, even if it’s for a short time
- on any part of the loan that is
- used for private purposes when you took out the loan or refinanced it
- redrawn for private purposes, even if you’re ahead in your repayments
- on a loan used to buy a new home if you don’t use it to produce income, even if you use your rental property as security for the loan
- on funds used to buy vacant land, until the time construction of your rental property is complete and available for rent (generally only applicable to individuals and discretionary trusts).
If your loan was used to buy a rental property and something else, such as a holiday or a car, you can’t choose to repay the part relating to your personal purchase, even when you refinance. All loan repayments are apportioned across both purposes until all the loan has been repaid and you are no longer claiming interest expenses for that property.
Example: Claiming part of the interest incurred
Sarah takes out a loan of $400,000, with $380,000 to be used to buy a rental property and $20,000 to buy a new car.
Sarah’s property is rented for the whole year from 1 July. Her total interest expense on the $400,000 loan is $35,000.
To work out how much interest she can claim as a tax deduction, Sarah must do the following calculation:
Total interest expenses × (rental property loan ÷ total borrowing) = deductible interest
$35,000 × ($380,000 ÷ $400,000) = $33,250
Sarah works out she can claim $33,250 as an allowable deduction.
TIP: Avoid redrawing from your rental property investment loan for private purposes to maximise your deductible interest.
Repairs and maintenance OR capital expenditure?
|Repairs||Repairing something that is worn out, damaged or broken as a result of renting out the property||eg. Fixing a leaking tap or replacing part of a damaged fence||Deductible in year of expenditure
|Maintenance||Preventing or fixing deterioration of something that occurred while renting out the property||eg. Repainting walls||Deductible in year of expenditure
|Initial repair||Repairing damage that existed when the property was purchased (whether you know or not)||eg. The cost to repair blocked plumbing or broken pipes||Capital Expenditure
Generally claimable as Capit Works or Depreciation
|Capital Works||Replacing an entire structure or renovating and adding a new structure to the property||eg. Replacing the roof or adding an extension||Capital Expenditure
Capital Works generally claimable at 2.5% per year
|Depreciable Assets||Adding or replacing an applicance or floor/window coverings||eg. Installing a new hot water system or new carpet||Capital Expenditure
Depreciation claimable each year based on efffective life of asset
|Depreciable Assets < $300*||Adding or replacing a minor appliance or low value item||eg. Installing a flyscreen or new window blind||Deductible in year of expenditure
*Tip: < $300 threshold is per person for jointly held rental properties
Tip: Consider obtaining a quantity surveyor tax depreciation report for your rental property to maximise depreciation and capital works deductions.
Lastly, remember the ATO’s three golden rules for claiming tax deductions:
- You must have spent the money yourself and weren’t reimbursed.
- If the expense is for a mix of income producing and private use, you can only claim the portion that relates to producing income.
- You must have a record to prove it
As well as keeping records of your rental income and expenditure, also remember to keep documents relating to the purchase and sale of your property so you can calculate your capital gain or loss when the property is sold.
If you have any questions or for further information regarding your rental property and claimable deductions, please contact your Bentleys’ Advisor.
The information contained in this article is general in nature and is not intended to be advice.