Rental property owners often ask us what can and can’t be claimed as a deduction. As a rental property investor it is worth familiarising yourself with the rules around rental property tax deductions to avoid disappointment at lodgement time. Costs of your rental property cannot always be claimed in the same tax year they occurred, or even in full. Some deductions may not be able to be claimed until you sell the property.
Here are a few important points to remember:
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- You can only claim rental property tax deductions for the period of the year that the property was tenanted or actively advertised as available for rent.
- If you share ownership of a property, each party claims a share of the tax deductions. If you own 50% of the property, you can claim 50% of the property expenses.
- If you rent out a property at a rate that is below market rate, your expenses are apportioned in the same ratio. For example, if market rate for your property is $500 per week however you rent your property out for $250 a week, all expenses are claimed at 50%.
| Claimed in the same tax year as you paid for them… | |
| Advertising fees | Management fees |
| Quantity surveyor fees | Body Corporate fees |
| Council rates | Water rates |
| Electricity and gas charges | Insurance |
| Interest on loans | Repairs and maintenance |
| Garden maintenance costs | Pool maintenance costs |
| Cleaning | Pest control |
| Telephone and internet expenses | Bookkeeping costs |
| Tax and accounting fees | Some legal expenses |
| Bank fees | Capital item purchases below $300 |
| Claimed over time… | |
| Stamp duty on loans | Loan set up fees |
| Title search fees | Legal expenses related to loans |
| Broker fees | Valuation fees |
| Mortgage insurance | Depreciation of capital items over $300 |
| Capital works (improvements or additions) | |
| Claimed when you sell the property… | |
| Legal costs for purchase and sale | Pre purchase building inspections |
| Stamp Duty | Inital repairs |
| Sale and purchase amounts | |
Capital works vs repairs and maintenance
As long as costs relate to ongoing maintenance while your property is rented (or available for rent), you claim the cost of repairs and maintenance the same tax year that you carry them out. However, claims for renovations or improvement costs (capital works) will need to occur over a period of time.
Repairs & Maintenance
The cost of repairs or replacements to a rental property (provided they are not improvements) are fully deductible in the year in which they are incurred. Examples of deductible repairs include repainting, fixing gutters or floors, fixing roof leaks, plastering, plumbing and replacing broken windows. Regular preventative maintenance e.g. gardening and pest control is also deductible. If the cost provides something new, and generally changes the character of the item, it may be classified as an improvement rather than a repair. This means you cannot obtain an immediate deduction but you will be still be able to claim over a period of time as either depreciation or capital works.
Capital works
Rental property construction costs are not fully deductible in the year in which you pay for them. Instead, property owners can claim a proportionate amount of the construction costs over time, called Capital Works deductions. Quantity Surveyors can prepare a report with a schedule of the amount to claim each year in association with the depreciation. For buildings constructed after 1987 this is generally 2.5%. You may be able to claim a deduction for the construction cost of:
- Buildings
- Structural extensions such as a garage or patio
- Structural alterations such as adding an internal wall
- Structural improvements such as a gazebo, carport, sealed driveway, retaining wall or fence
2017 Federal Budget Changes
Depreciation
In the recent Federal Budget, the Government announced its intention to limit the depreciation deductions available. Investors who purchased residential rental property after Budget night (9 May 2017, 7:30pm) may not be able to claim the same tax deductions as investors who purchased property prior to this date.
Investors who directly purchased plant and equipment – such as ovens, air conditioning units, swimming pools, carpets etc., for their residential investment property after 9 May 2017 will be able to claim depreciation deductions over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. If you are not the original purchaser of the item, you will not be able to use the depreciation rules to your advantage. This is very different to former rules with successive owners being able to claim depreciation deductions.
Investors will still be able to claim capital works deductions including any additional capital works carried out by a previous owner. This is based on the original cost of the construction work, rather than what a subsequent owner paid to purchase the property.
No more deductions for travelling to and from your investment property
From 1 July 2017, the Government intends to abolish deductions for travel expenses related to inspecting, maintaining, or collecting rent for a residential rental property.
Further help:
In recent years, the ATO has flagged rental property deductions as an area of focus for audit activity. It is therefore crucial that property owners know what they can and can’t claim and keep excellent records.
If you would like to discuss this article or your rental property deductions with our tax experts, please get in touch. You can contact us on 07 3023 4800 or at mail@marshpartners.com.au
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