Landlords often get confused about what they can and can't claim for their rental properties and what seems like perfect sense in the real world doesn't always equate to the way the ATO views deductions
Australia's investment love affair with investment property means that many of us consider property as a significant chunk of our wealth generation. However what many investors get confused over is what is deductible and what isn't.
Generally, deductions can only be claimed if they were incurred in the period that the property was rented out or during the period when the property was genuinely available for rent. That means that a tenant needs to be in the property or you are actively looking for a tenant.
Keeping a property vacant while renovating it may mean you aren't able to claim expenses whilst it's empty and not on the market as available to rent (there are some exceptions to this rule).
There needs to be a relationship between the money you make and the deductions you claim. Here are a few common problem areas.
Interest on bank loans
Only the interest on repayments for investment property loans, and bank charges, are deductible - not the actual loan itself. Also, if a loan facility is used for multiple purposes then only some of the interest expenses might be deductible.
For example, if some of the loan is used to acquire or renovate a rental property but further funds are drawn down to pay for a holiday then this is a mixed purpose loan and only the part used to renovate the property can be claimed, not the funds used for the holiday.
Repairs or maintenance?
Deductions claimed for repairs and maintenance is an area that the ATO is looking very closely at so it's important to understand the rules. An area of major confusion is the difference between repairs and maintenance, and capital works.
While repairs and maintenance can often be claimed immediately, the deduction for capital works is generally spread over a number of years.
Repairs must relate directly to the wear and tear resulting from the property being rented out. This generally involves restoring a worn out or broken part - for example, replacing damaged palings of a fence or fixing a broken toilet.
The following expenses will not qualify as deductible repairs, but are capital:
- Replacement of an entire asset (for example, a complete fence, a new hot water system, oven, etc.)
- Improvements and extensions where you are going beyond the work that is required to restore the property back to its former state
Also remember that any repairs and maintenance undertaken to fix problems that existed at the time the property was purchased are not deductible, even if you didn't find out about the problem until later.
The sharing economy
The deductions you can claim for 'sharing' a room or an entire house are similar to rental properties.
You can claim tax deductions for expenses such as the interest on your home loan, professional cleaning, fees charged by the facilitator, council rates, insurance, etc. But, these deductions need to be in proportion to how much and how long you rent your home out.
For example, if you rent your home for two months of the financial year, then you can only claim up to 1/6th of expenses such as interest on your home loan as a deduction. This would need to be further reduced if you only rented out a specific portion of the home.
Friends, family and holiday homes
If you have a rental property in a known holiday location, the ATO is likely to be looking closely at what you are claiming.
If you rent out your holiday home, you can only claim expenses for the property based on the time the property was rented out or genuinely available for rent – and only if the property was not actually being used for private purposes at that time.
If you, friends or relatives use the property for free or at a reduced rent, it is unlikely to be genuinely available for rent and as a result, this may reduce the deductions available. It's a tricky balance particularly when you are only allowing friends or relatives to use the property in the down time when renting it out is unlikely.
A property is more likely to be considered unavailable if it is not advertised widely, is located somewhere unappealing or difficult to access, and the rental conditions - price, no children clause, references for short terms stays, etc., - make it unappealing and uncompetitive.
As always, we recommend getting advice on property-related expenses as they can have a significant impact on your tax and income if you get them wrong. For more information, contact us on 02 9957 4033.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.