Rental property claims that are often misunderstood
The Tax Office has found that there are some landlords who may not be entirely sure about whether they are correctly claiming their rental property deductions. In particular, it has found that many property investors are making simple mistakes that could be avoided with a little guidance.
The Tax Office has identified some of the common errors that have been made by rental property owners in past income years.
- 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 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 expenses in the same income year
Repairs and maintenance
A non-capital repair to correct defective or worn-out parts of an investment property, or to return a deteriorated part to its former condition, is deductible. 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. If you start to use the property for private purposes, you cannot claim any interest expenses you incur after the time you commence using it in that manner. Speak to TNR for more information on this.
Deductible interest is also available on a loan taken out to:
- carry out renovations
- purchase depreciating assets (for example, furniture), and
- make repairs or carry out maintenance.
Telephone, stationery and postal expenses
Calls to or letters to tenants, real estate agents and tradesmen are deductible, so be sure to keep good records.
Agent fees and commissions
Claims are allowed for fees and commissions paid to real estate agents to let properties and collect rent. You cannot however 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
Body corporate fees and charges that are incurred to cover day-to-day administration costs, maintenance or put into a special purpose fund are deductible. However, payments to a special-purpose sinking fund to cover the cost of capital improvements or capital repairs are not immediately deductible as they typically constitute capital works.
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.
While you cannot claim the cost of travelling expenses while searching for a property to buy, travel expenses once you own the rental property are typically deductible if incurred:
- 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.
A full deduction is allowed when the sole purpose of the trip relates to the rental property. However, if the trip also includes a private purpose, only a partial deduction will be allowed.
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. However, repairs of faults which existed at the time of first being let are not deductible.
If you have other costs from your rental property that you think may be immediately deductible, please contact TNR.
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.
These can include:
- borrowing expenses – including loan establishment fees, title search fees, costs for preparing and filling mortgage documents, mortgage broker fees and stamp duty charged on the mortgage. If you take out an insurance policy to cover the loan in case you cannot meet repayments, these premiums are not deductible. Landlord insurance premiums can
however be deducted.
- amounts for decline in the value of depreciating assets such as air conditioners, heaters, hot water systems, vacuum cleaners, dishwashers, clothes dryers and so forth
- capital works deductions – deductions for certain types of construction like the reconstruction of a garage destroyed by a fire where the work constitutes a structural improvement to the rental
The amount of time these expenses are spread across depends on the type of expense. For instance, a loan expense is spread over the lesser of five years or the life of the loan under special rules. Assets that depreciate in value do so over their “effective” life and certain construction work deductions may be spread across 40 years.
What you cannot claim
Common expenses that are not deductible include:
- acquisition and disposal 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)
- expenses that your tenants pay such as electricity or water charges, and
- expenses not related to the rental of a property such as during personal use of a holiday home that is rented out for part of the year.
The above is not an exhaustive list of all claimable and nonclaimable rental property expenses. Contact TNR for more information.