Many property investors are making simple mistakes when claiming tax deductions for their rental property, which could be avoided with a little guidance.
The following checklist provides examples of many of the common claimable and non-claimable rental property expenses. Check them off to see where you stand, and please contact us for more information specific to your situation.
The Tax Office has identified some of the common errors that have been made by rental property owners in past income years. These include:
- claiming rental deductions for properties “not genuinely available” for rent
- incorrectly claiming deductions for properties only available for rent part of the year (like a holiday home)
- incorrectly claiming structural improvement costs as repairs when they are capital works deductions, such as re-modelling a bathroom or building a pergola, and
- overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property.
There are two categories of rental property expenses that you can claim:
- expenses deductible in the year you paid them — like council rates, repairs, insurance and loan interest, and
- expenses that are deductible over a number of years — like borrowing costs, claims for structural improvements and the costs of depreciating assets (for example, a stove).
Claims for rental property expenses in the same income year
Repairs and maintenance
However, the renewal or replacement of a complete structure is usually considered to be a capital expense and is not deductible. This could include for example a fence that is completely replaced or a stove that is scrapped and replaced with a new one.
Similarly, repairs to a rental property shortly after purchase is typically a capital expense if the repair is to rectify a defect that existed at the time of purchase (referred to as an “initial repair”).
Care should be exercised when the materials used in conducting a repair are superior to the original product as the expenditure may be considered capital in nature on the basis that the asset has been “improved”.
Examples of deductible and non-deductible repairs may include:
- Replacing broken windows
- Maintaining plumbing
- Repairing electrical appliances.
- Insulating a house/unit
- Replacing an entire roof.
Interest on a loan is deductible provided the loan is to purchase a rental property and meet improvement costs or running expenses while the property is rented, or is available for rental. It may be the case that interest is deductible over the time that a property, which is to become income producing, is under construction.
- carry out renovations
- purchase depreciating assets (for example, furniture), and
- make repairs or carry out maintenance.
Telephone, stationery and postal expenses
Agent fees and commissions
However, you cannot claim the cost of commissions paid to a real estate agent or other person for the sale or disposal of a rental property and you cannot claim the cost of the buyer’s agent fees paid to a person you engage to find you a suitable rental property to purchase. This is normally included in the cost base of the property.
Body corporate fees
Drawing up leases
The costs of drawing up a lease are typically deductible. It includes a deduction for the cost of preparing, registering or stamping a lease of a property – including costs associated with an assignment or surrender of a lease – where the property is used solely for the purpose of producing assessable income.
- inspecting the property
- collecting rent
- showing prospective tenants through the property
- carrying out repairs, including travel to acquire material for those repairs, or
- visiting the real estate agents for purposes such as leaving keys, signing lease agreements or discussing matters relevant to the letting.
Letting residence while on transfer of employment
If the property is let on an arm’s length commercial basis during the transfer of employment, losses and outgoings in relation to the letting of it during that time are deductible. This includes deductions for interest incurred during that time, and depreciation on furniture and fittings for the period that the house is let.
If you have other costs from your rental property that you think may be immediately deductible, please contact us.
Expenses that need to be deducted over time
There are some expenses you will need to deduct over a number of years as a landlord. The amount of time these expenses are spread across depends on the type of expense (ask us for specific details).
Expenses deducted over a period of time can include:
Capital works deductions
What you cannot claim
Common expenses that are not deductible include:
Acquisition and disposal costs
Costs such as purchase cost of the property, advertising expenses, stamp duty on the transfer of the property and legal costs (although they may be included in the calculation of a capital gain or loss on disposal)
Non-rental related expenses
This is not an exhaustive list. Please speak to us for information specific to your circumstances.