The tax deductions you can and can't claim on your investment property
Of the various items of expenditure that you might incur in running a rental property, probably the most significant is the amount you pay on your mortgage. The interest element of your mortgage repayment is deductible for tax purposes.
In addition to interest relating to the property acquisition, you can also claim a deduction for interest on loans taken out to: carry out renovations; purchase depreciating assets (for example, furniture); make repairs or carry out maintenance; or purchase land on which a property is to be built.
There are lots of other things you can claim, some more obscure than others. If any of these apply to you, make sure you include them in your tax return:
- Advertising for tenants, including costs passed on by letting agents.
- Cleaning at the end of a tenancy (including removal of rubbish).
- Estate and letting agents (including management fees).
- Gardening and lawn mowing (including felling or pruning trees).
- Secretary and bookkeeping fees associated with the collection of rent and payment of property expenses.
- Bank charges on the account used to receive rent and pay expenses.
- Council rates and land tax.
- Insurance (building, contents or public liability).
- Credit checks.
- Pest control.
- Bank or solicitor fees for keeping title documents safe.
- Taxation advice relating to the property (including possibly the cost of this magazine!)
- Legal expenses to eject a tenant for non-payment of rent.
- Hiring a debt collector to collect rent arrears.
- Getting new keys cut.
- Servicing items such as hot water heaters, smoke alarms, air-conditioning systems and garage door mechanisms.
- Water supply charges (to the extent that they aren't paid by the tenant).
- Quantity surveyor.
- Security patrols.
- Security system monitoring and maintenance.
Mistakes investors make claiming tax deductions
1. Claiming excessive interest expenses, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
2. Incorrectly apportioning rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly.
3. Claiming repairs for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years or are added to the cost base of the property for CGT purposes. Expect to see the ATO checking such claims and pushing back against claims which don't stack up.
4. Incorrectly treating properties that are rented out to friends or family at a discounted rate. This will be regarded as a non-commercial rental. The income will still be taxable but you'll only be able to claim deductions up to the amount of rent you've received. You won't be able to make a loss; if you were relying on negative gearing, that isn't a desirable outcome!
5. Claiming deductions for investment properties that are not genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can't be claimed. This is particularly important for holiday homes, where the ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free.
Recently the ATO issued a list of four questions holiday home owners should be asking themselves; consider your answers to these to determine if you have anything to be concerned about:
- How do you advertise your rental property?
If your property is advertised on a widely seen online site, that's a good indication that the property is available for rent. If your only form of marketing is a tatty card in your front door window, you might need to be concerned!
- What location and condition is your rental property in?
If your property is in good repair, tenants will want to rent it. If it's a hovel, chances are tenants will give your property a wide berth, particularly if you are charging rent that's on a par with much more desirable rentals in the same area.
- Do you have reasonable conditions for renting the property and charge market rate?
If you set conditions that will deter a reasonable potential tenant - such as rent significantly above market rates or clauses such as "no children", your property may not be regarded as genuinely available for rent.
- Do you accept interested tenants, unless you have a good reason not to?
If you're unreasonably fussy about who you rent to, the ATO might conclude that you don't really want to rent to anybody and that your property isn't actually available for rent.
Tips for getting the best tax refund
Check with your tax agent that you are claiming everything that you are entitled to.
As well as the obvious deductions mentioned below, you may not know that you can claim for the following:
- Prepaid expenses. If you pay an item of expenditure this year that wholly or partly relates to next year, you can claim a deduction for the full amount this year. This is particularly useful with expenses that straddle the tax year, such as insurance policies or subscriptions.
- If you use your home phone, computer or internet services, or your mobile phone as part of the management of your investment property you can claim an appropriate proportion as a tax deduction.
It can also be worthwhile getting a quantity surveyor to quantify the depreciation claims that you are entitled to. Depreciation is generally one of the larger deductions, it is difficult to correctly work out and many homeowners miss out on potential deductions by incorrectly claiming.