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:

• 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 and;
• overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property.

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:

Expenses deductible in the year it is paid for (Annual Expenses) Expenses to be claimed over a number of years Non-deductible expenses

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.

Annual Expenses

Interest

Interest is deductible in the following scenarios:

• The loan is used for purchase of the rental property and the property is rented or available to rent. Interest is also deductible over the time that a property, which is to become income producing, is under construction.
• The loan is taken out for renovations, purchase of depreciation assets or maintenance so as long as they relate to the rental property.

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

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).

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. 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

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.

Travelling expenses

Travel expense incurred once you own the property are typically deductible if they are incurred to:

• inspect the property
• collect 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 available if the sole purpose of the trip was to the rental property. However, if the trip also includes a private purpose, only a partial deduction will be allowed.

Travel costs associated with searching for a property to buy can’t be claimed.

Expenses to be claimed over a number of years

Borrowing expenses

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.

Depreciating assets and structural improvements

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).

Non-deductible expenses

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. These expense may however be included in the cost base for capital gains purposes.
• 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 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.