Navigating rental tax claims
As an owner of a rental property, you are entitled to claim tax deductions for some of the expenses you incur.
You need to understand which expenditure category your costs fall into. The three categories are: An expense you cannot claim a deduction for.
An expense you can claim an immediate deduction for in the income year you incur the expense.
An expense you can claim deductions for over several income years.
Expenses you cannot claim tax deductions on include:
Acquisition and disposal costs of the property.
Expenses not actually incurred by you, such as water or electricity charges.
Expenses that are not related to the rental of a property, such as expenses connected to your own use of a holiday home that you rent out for part of the year.
There are expenses you incur that you can claim tax deductions for over several income years.
These deductions fall into three categories.
Borrowing expenses — expenses directly incurred from taking out a loan on your property.
It includes loan establishment fees, title search fees and costs for preparing and filing mortgage documents. Also included are costs that you incur based on your lender’s requirements, for example, lender’s mortgage insurance. Borrowing expenses do not include interest expenses or insurance policy premiums.
Depreciating assets — the Australian Tax Office states you are entitled to deduct an amount equal to the decline in value for an income year of a depreciating asset you held for any time during the year.
Examples include carpets depreciated over 10 years, curtains depreciated over six years and solar powered generating systems depreciated over 20 years.
Capital works deductions — these are certain kinds of construction expenditure.
These deductions would generally be spread over a 25 or 40-year period. Capital works deductions include things like a building or an extension, alterations to the property, for example, removing or adding an internal wall structural improvements to the property.
You are unable to claim capital works deductions until construction is complete, and your total capital works deductions cannot exceed the construction expenditure.
You may also only claim deductions for the period during the financial year that your property is rented or available for rent.
For a detailed explanation of the expenses you can and cannot claim tax deductions for, refer to the ATO’s 2014 guide for rental property owners.