Owning rental property is a popular choice for investment and generating additional income. When administered correctly, there are many benefits to be had from owning rental properties, including tax benefits and deductions.
Australia’s income tax system is based on self-assessment. This means that the taxpayer is responsible for lodging tax returns which comply with taxation laws. Therefore, as a rental property owner, it is important to be aware of what you can, and cannot, do in relation to claiming rental property deductions. Getting it wrong could result in amended tax returns, additional costs, as well as penalties and general interest charges.
Professional Help for Your Rental Property Deductions
Some of the rental property deductions are pretty straightforward, and others not so much. That is why it is important to enlist the advice and guidance of a professional tax accountant, like the team at The Quinn Group, to ensure that not only are you maximising your returns when it comes to investment properties, but that you are correctly meeting your legal tax obligations too.
Top Tips for Getting Rental Property Deductions Right
The ATO has said that the most common reason for amendments to tax returns relate to incorrect rental property expense claims. Here’s some things to be aware of to help you get it right when it comes to claiming deductions for your rental property.
Dividing Rental Income & Expenses between Owners/Partners
If you own a rental property with someone else (husband and wife for example), you must declare rental income and claim expenses according to your legal ownership of the property. As joint tenants your legal interest will be an equal split, and as tenants in common you may have different ownership interests.
It is important to note that any agreement that the owners in a joint tenancy might draw up to divide the income and expenses in proportions other than equal shares has no effect for income tax purposes.
Claiming & Apportioning Interest for Private Portion of Loans
If you take out a loan/mortgage to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a rental property deduction. If a loan is obtained, or updated, to cover the purchase of both a rental property and, for example, a private car, boat or holiday, the interest on the loan must be apportioned into deductible and non-deductible parts.
Claiming the Right Portion of your Expenses
If part of your property is used to earn rent or you rent out the property for only part of the year (perhaps it is your holiday home for the remaining portion) you must apportion your expenses to reflect the proportional area and/or the numbers of days that the property was rented. Your ability to claim rental property expenses depends on whether the property is genuinely available for rent, your private use of the property, or if you rent to family or friends at below market rates.
Holiday homes – the deductions may be reduced where the home is rented out to family and friends at less than market value. The ATO will disallow claims for rental property deductions if there are no genuine attempts to rent the holiday home.
Your Property must be Genuinely Available for Rent
Your property must be genuinely available for rent in order to be eligible to claim rental property tax deduction. This means:
- you must be able to show a clear intention to rent the property
- advertising the property so that someone is likely to rent it and set the rent in line with similar properties in the area
- avoiding unreasonable rental conditions.
Repairs & Maintenance vs Capital Works
Ongoing repairs that relate directly to wear and tear or other damage that happened while renting out the property can be claimed in full in the same year you incurred the expense. For example, repairing the hot water system or part of a damaged roof can be deducted immediately.
Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings and repairing damaged floorboards are not immediately deductible, but a deduction may be claimed over several years as a capital works deduction. These costs are also used to work out your capital gain or capital loss when you sell the property.
Replacing an entire structure like a roof when only part of it is damaged or renovating a bathroom is classified as an improvement and not immediately deductible. These are building costs that you can claim at 2.5% each year for 40 years from the date of completion.
If you completely replace a damaged item that is detachable from the house and it costs more than $300 (for example, replacing the entire hot water system) the cost must be depreciated over a number of years.
Keep Good Records to Substantiate Rental Property Deductions & Income
Making sure that you keep the right records for each stage of your investment property journey will help to ensure that you’re able to claim everything you’re entitled to.
You must have evidence of your income and expenses to claim a deduction. Capital gains tax may apply when you sell your rental property, so it is important that you keep all records for the period you own the property and for a further 5 years from the date you sell it.
Keep records of every transaction over the period you own the property. This includes contracts of purchase and sale, as well as conveyancing and loan documentation. You should keep records of all related fees and expenses incurred during the process of acquiring, owning and disposing of the property, as well as details of periods of rent versus private use and evidence of efforts to rent the property.
If you have multiple rental properties you should record your transactions and deductions separately for each property.
Advice for Rental Property Deductions
The experienced tax accountants at The Quinn Group can assist you to ensure that you are claiming all the rental property deductions that you are entitled to, and legally maximise your return. Contact us on (02) 9223 9166 or submit an online enquiry to schedule an appointment.
