Rental Properties
What you can claim now & what you can't claim
Over two million Australians reported a rental property in their income tax return, according to the most recent ATO statistics. And while I’d prefer to see everyday Aussies earning a positive return on their rental property the ATO allows the owners of negatively geared rental properties, to offset their rental losses against their other assessable income. And if you happen to own a rental property, here’s a rundown of what you can claim right now and what you can’t. But first let’s look at what is rental income.
Rental income
Generally we think of rental income in the form of a long term agreement between a landlord and a tenant, perhaps renting out a whole house for six to 12 months.
Rental income can also be received from renting out a holiday home, from a short-stay platform, renting out a room to students, or renting to family and friends:
• short-term rentals - holiday homes
• sharing platforms - AIRBNB, Homeaway
• partial home rental - renting out a room
• domestic rentals - family at mates rates.
The rental income you earn can be paid in cash or as an exchange of goods and services. You will need to work out the value of payments you receive in the form of goods and services.
Rental income may include payments such as:
• bond money kept due to property damage
• booking cancelation fees
• insurance payouts for water damage
• reimbursements for excess water
• rebates for solar hot water
Remember to include all rental income in your tax return and tell your tax agent about any other rental income your receive.
Seven Common Mistakes
Rental property expenses can be categorised into three deduction categories:
• expenses you can claim in the year paid
• exp[enses you can claim over time
• expenses you cannot claim
To help you get your residential rental property deductions right here are some of the common mistakes people make.
1. Co-owned properties
Co-ownership of property can happen several ways. The legal ownership on the title will either be as tenants in common or as joint owners.
Joint tenants each hold an equal ownership interest in the property, for example, one may hold a 50% interest and the other a 50% interest.
Tenants in common, hold a specific proportion of the property which may be different ownership interests, for example, one may hold a 20% interest and the other an 80% interest.
If you and your co-owners are investors you must divide the income and expenses for the rental property in line with each person’s legal interest in the property.
Rental properties can also be co-owned by partners in a business of letting rental properties.
If you are in a partnership rental property business you must divide the income and expenses for the rental property in accordance to the partnership agreement.
2. Genuinely available for rent
If you claim a rental property deduction, the property must be genuinely available for rent. Advertising the property within a restricted
Facebook group, by word of mouth, at your work place may not support the property being genuinely available for rent. Neither would rent to interested parties without reason.
You can demonstrate that the property is genuinely available for rent, when:
• The property is tenanted
• It is publicly advertised for rent
• There are no unreasonable conditions
3. Initial repairs versus capital improvements
Deductions for repairs generally must relate to the fair wear and tear or damage that happen over time. For example a fencing post has come loose and needs repairing would be claimable in the year of the repair.
Initial repairs however, are not immediately deductible as these are considered a part of the property. A capital works deduction may be available and claimed over a number of years.
If the cost of the initial or other ongoing repair is less than $300, it can claimed immediately in the year of the repair.
Capital improvements are generally structural repairs, such as a bathroom or kitchen renovation. These are building costs that are generally claimed at 2.5% over 40 years.
4. Borrowing expenses
Borrowing expenses include stamp duty on the mortgage, loan establishment fees, mortgage insurance, and valuation fees required for the loan approval.
If the borrowing costs are over $100 then the cost is deducted over five years. You will have to apportion the first year by the number of days in the year. If the loan is paid out prior to the five years, then the balance of the borrowing costs are deducted in that year.
5. Purchase costs
When you purchase a rental property some of the purchase costs are treated as capital expenses and are not deductible until you sell the property.
Capital expenses include, conveyancy costs, title search fees, valuation fees, and stamp duty. The legal fees, valuation fees, and property inspection fees paid prior to settlement are also capital expenses.
You should keep a record of these expenses together with the property purchase contract and settlement statement. These documents will help with the calculation of the capital gain.
6. Capital allowances
You can generally claim the capital allowance or commonly known as depreciation each year over the life of the asset. However there is an exception. Individual investors cannot claim a deduction for a decline in value of secondhand depreciating assets.
Depreciable assets are items that do not form part of the structure of the rental property. Items such as a hot water system, carpet, blinds, ceiling fans that can be moved or removed are examples of depreciating assets.
The decline in value of a depreciating asset starts when you first use it, or install it ready for use. If the asset is less than $300 you can claim an immediate deduction in the year it was bought.
7. Private use
It should go without saying that you cannot claim a deduction for the private use of an asset. Similarly, when you use your rental property for private use you will need to apportion the deductions. If you used the property 15% of the time during the year, then you will reduce each of the expenses by 15%.
Interest deductions can be difficult particularly if your mortgage is a line of credit. You cannot claim the portion of interest, if the loan is used to purchase something for personal use such as buying a new car or renovating your private home. You can only claim the part of the interest that relates to the rental property.
8. Commercial properties
There are some specific rules that apply to owners of commercial property, which haven't be considered here, including whether you will need:
• an ABN
• register for GST
• can claim second hand assets
9. Other rental properties
There are other types of rental properties that will have similar issues. Keep in mind what rental properties you own and what the specific issues might be if you own nonresidential property.
• boating – berths, moorings, and pens
• aviation – hangers and lockers
• vehicles – parking bays, storage spaces
10. Record keeping
So you may claim everything you are entitled to, you must have evidence of your income and all your expenses. Records are written evidence of your income or expenses and can be in paper or electronic form.
Always, always keep your records. It is a common misconception that you only need to keep your records for two years. The general rule is five years after the tax return was lodged. Your purchase records need to be retained until well after you have sold the property. In fact five years after the tax return for the year in which the property is sold.
11. Professional advice
Rental property income and deductions will seem relatively easy for some and more complicated for others.
A registered tax agent will be able to assist you calculate the rental income, deductions, and capital gains when you come to sell, and provide you with the confidence that your income tax return has been prepared correctly.
If you are one of the owners of a residential property, see our checklist to help you prepare for this tax season.