ATO audits have found that some landlords are incorrectly claiming rental property expenses. In particular, it has found that many property investors are making simple mistakes that could be avoided with a little guidance. These common mistakes include:
At Infinity Accounting and Finance, we have compiled a list below of the most common rental property deductions that landlords misinterpret. The expenses have been broken up into three categories:
Please note that for deductions to be available, the property must be rented out at an arm’s length commercial basis. If it is not an arm’s length commercial basis, the deductions must be apportioned accordingly.
Interest is deductible in the following scenarios:
If you start to use the property for private purposes, you can’t claim any interest expenses you incur after the time you commence using it in that manner.
Agent fees and commissions are deductible as long as they relate to fees paid for the letting or collecting of rent for properties. Commissions paid to a real estate agent or other person/s for the sale or disposal of a rental property can’t be claimed. This is normally included in the cost base of the property when sold (capital gains purposes).
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. For example replacing a window or repairing electrical appliances.
The improvement, renewal or replacement of a complete structure is however considered to be a capital expense and is not deductible immediately. This is to be deductible over the “useful life” of the asset. Examples include replacing a fence. 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 also 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”.
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.
Travel expense incurred once you own the property are typically deductible if they are incurred to:
Travel costs associated with searching for a property to buy can’t be claimed.
Borrowing expenses include items such as 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. The loan expense is expense is spread over the lesser of five years or the life of the loan under special rules.
Decline in value of depreciating assets such as air conditioners, heaters, hot water systems, vacuum cleaners etc. can be deducted over the life of the asset (“effective life”). This will vary from asset to asset so please talk to us or visit the ATO website for further information.
The building and other structural improvements (building new garage due to fire) to the rental property can also be deducted. The decline in value for these items is generally apportioned over 40 years (can vary for certain items).
Common expenses that are not deductible include:
The information mentioned above relate to common mistakes made by landlords and does not include other expenses which can be claimed by a landlord in relation to a rental property.
For further information regarding rental property deductions, please contact one of our friendly staff members for an obligation free consultation on (03) 9792 2772.
Established in 1999, Infinity Group is a multi-service firm that specialise in the areas of Finance, Property, Accounting & Taxation, Insurance and Migration Services.