Come tax time, every penny counts – particularly in the case of investors. Owners of rental properties are entitled to tax deductions in connection with their investments but do you know what these deductions are and how you can save yourself from paying more? Read our guide below for a rundown of claimable rental property expenses.
What you can claim
There are two broad categories of claimable rental property expenses:
- those you can claim in the same income year that you incurred them provided your tenant did not pay them, and
- those you need to deduct over a number of years.
1. Expenses you can claim in the income year they are incurred
Repairs and maintenance
A non-capital repair to correct a defective or worn- out part, or to return a deteriorated part to its former condition is deductible.
However, the renewal or replacement of a complete structure – such as a fence – is usually considered to be a capital expense and is not deductible. Similarly, repairs to a rental property shortly after purchase is typically a capital expense if the repair is to rectify a defect which existed at the time of purchase.
Be careful if the materials used in conducting a repair are superior to the original product as it may be a capital expense on the basis that the asset has been ‘improved’.
Repairs may still be allowed as a deduction even though the property is no longer available for rent, provided the repairs are in respect of defects arising during the period when the property was used to produce assessable income.
Examples of deductible and non-deductible repairs
|Deductible Repairs||Non-deductible improvements|
|Replacing broken windows||Landscaping|
|Maintaining plumbing||Insulating a property|
|Repairing electrical appliances||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 is often the case that interest is deductible whilst 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.
Deductible interest is also available on a loan taken out:
- for renovations
- to purchase depreciating assets (e.g. furniture), and
- for repairs.
Costs of obtaining finance
Examples of deductible costs of obtaining finance are
- legal expenses associated with mortgage documents, stamp duty valuation and survey overdraft guarantee fees, and
- procurement and search fees.
Body corporate fees
Body corporate fees that are incurred to cover administration costs, day-to-day maintenance or put into a special purpose fund are deductible. However, payments to a special-purpose sinking fund to cover the cost of capital expenses are not immediately deductible. You cannot claim a separate deduction for a particular expense – such as the maintenance of gardens – if that expense is already included in your body corporate fees.
Below are further sundry costs which would typically be deductible:
- cost of calls or letters to tenants, real estate agents and tradesmen
- fees and commissions paid to real estate agents to let properties and collect rent
- secretary, bookkeeping and safekeeping fees associated with the collection of rent, payment of expenses and title documents respectively
- rent paid if subletting
- cost of preparing, registering or stamping a lease of a property
- legal expenses to eject a tenant for non-payment of rent
- advertising for tenants
- mortgage discharge fees
- council rates and land tax
- insurance premiums paid for building, contents or public liability
- bank charges on the rental account
- pest control
- cutting new keys
- cleaning expenses (rubbish removal etc.)
- gardening expenses (tree trimming etc.)
- advice about taxation matters relevant to the property
- services of tradesmen when not associated with a capital expense
- servicing costs
- security system monitoring, maintenance, patrol fees, and
- losses and outgoing when letting residence while on transfer of employment.
While you cannot claim travelling costs in search of a property to purchase, travel expenses once the property has been purchased and is income-producing are typically deductible if incurred in:
- inspecting the property
- collecting rent
- showing prospective tenants through the property
- carrying out repairs, including travel to acquire material for those repairs, and
- visiting the real estate agents for purposes such as leaving keys, signing lease agreements or discussing relevant matters.
A full deduction is allowed when the sole purpose of the trip relates to rental property. If the trip also includes a private purpose, only a partial deduction is allowed.
2. Expenses you need to deduct over a number of years
- borrowing expenses – includes 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
- amounts for decline in the value of depreciating assets such as air conditioners, heaters, hot water systems and so forth
- capital works deductions such as the reconstruction of a garage destroyed by a fire where the work constitutes a structural improvement to the rental property.
The amount of time these expenses are spread across depends on the type of expense. A loan expense is spread over the lesser of five years or the life of the loan, assets that depreciate in value do so over their ‘useful’ lifetime and certain construction work deductions may be spread across 40 years.
What you cannot claim
Expenses that are not deductible are:
- 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.
This guide is not an exhaustive list of all claimable rental property expenses. Contact this office for more examples of what can and cannot be claimed and a full list of depreciation tables.
Welcome to the InterActive Tax Consultants’ news – part of our personal and easy to understand approach to taxation. We are committed to working with you to achieve the best results for your business. If you have any question or would like more information on any of the articles please contact us.