If you invest in a rental property there are a number of key tax benefits available to property investors however, it can sometimes be difficult to navigate through the deductibles, depreciation, and tax benefits.
If you’re a landlord, you do not require extensive knowledge of the taxation system and these tax benefits can be hugely helpful in offsetting the cost of holding a property.
We have outlined some of the main tax considerations and outlined what you can and should be claiming on your investment property.
Record Keeping
If you invest in a rental property or rent out your current property, you’ll need to keep records right from the start, work out what expenses you can claim as deductions, and declare all your rental-related income in your tax return.
You’ll want proof of all your expenses so you can claim everything you’re entitled to. You’ll also need records of the date and costs of buying the property so you can work out any capital gain (or capital loss) when you dispose of it.
|
Records |
Type of records |
How long do I keep this for? |
| Rental Income(s) | Annual statement(s) from your Property Manager(s). | 5 year rule. * |
| Purchase date and cost. | Contract of Sale. | 5 year rule. * |
| Repairs and Maintenance. | Receipts or Annual Statement from Property Manager. | 5 year rule. * |
| Renovations | Tax invoices. | 5 year rule. * |
| Deductible expenses | Receipts or Annual Statement from Property Manager. | 5 year rule. * |
| Capital Gains Tax on Selling your property. | To be calculated from records on every transaction over the period of ownership of the property. Keep records of prior tax returns to assist with this. (e.g. Contracts, conveyancing, loan documents, etc.) | 5 year rule. * |
* 5 year rule- to keep these records for five years from 31 October (or 5 years from the date your tax return is lodged).
Co-ownership of rental property
Where a rental property is owned jointly, rental income and expenses must be divided among the co-owners according to their legal interest in the property. This is despite any written or oral agreement between co-owners stating otherwise.
If they own the property as:
- joint tenants – they each hold an equal interest in the property
- tenants in common – they may hold unequal interests in the property (for example, one may hold a 20% interest and the other an 80% interest).
INCOME
You must declare in your tax return the full amount of rent and any other rental-related income you receive (or become entitled to) when you rent out your property – whether paid directly to you or through your agent.
Rental-related income also includes:
- rental bond money you become entitled to retain – such as when a tenant defaults on the rent, or damage to your rental property requires repairs or maintenance
- insurance payouts in some circumstances – such as where you receive an insurance payment to compensate for damage to your property or for lost rent
- letting and booking fees you receive
- associated payments you receive, or become entitled to, as part of the normal, repetitive and recurrent activities through which you intend to generate profit from the use of your rental property (if these payments are in the form of goods and services you’ll need to work out their monetary value)
- reimbursement or recoupment for deductible expenditure – for example:
- if you receive an amount from a tenant to cover the cost of repairing damage to your rental property and you can claim a deduction for the cost of the repairs, you need to include the whole amount in your income
- if you receive a government rebate for the purchase of a depreciating asset, such as a solar hot-water system, you may need to include an amount in your income (see Taxation Determination TD 2006/31)
- any excessive deductions for capital allowances involving your rental property where a limited recourse debt is terminated without you paying it in full.
Goods and services tax
GST doesn’t apply to rent on residential premises. If you rent out residential accommodation, you’re not liable for GST on the rent you charge.
Disposing (selling) of your investment property
Any capital gain you make when selling or otherwise disposing of the property will be subject to capital gains tax (CGT) except in some circumstances where you rent out the home you’ve been living in.
Property not rented or available for rent
If you have an investment property that is not rented or available for rent – such as a holiday home, hobby farm, or another dwelling you choose not to rent:
- the property is subject to CGT in the same way as a rental property
- you generally can’t claim income tax deductions for the costs of owning the property because it doesn’t generate rental income
- you may be able to include your costs of ownership in the property’s cost base, which would reduce any capital gains tax liability when you sell it.
When investing in a rental property, you’ll need to keep records right from the start and work out what you can and can’t claim as a deduction. If you buy the property with someone else, you’ll also need to work out how to divide the income and expenses.
If you make a net profit from renting your property, you may need to make pay as you go (PAYG) instalments towards your expected tax liability. Generally, you only declare the income you earn from a property and claim related expenses if your name is on the title deed.
If you buy a property, the date you enter into the contract – not the settlement date – is your date of purchase for capital gains tax purposes. Apart from buying, you can obtain a property by inheriting it, receiving it as a prize or gift, or having it transferred to you as a result of a marriage breakdown.
EXPENSES
To claim deductions for expenses, your property must include a dwelling that is rented or available for rent – for example, advertised for rent. If you’re building a rental dwelling, you can claim deductions for the land while you are building.
|
Type |
Claimable? |
Deductible/ Depreciable? |
| Property management Fees | Yes | Immediately deductible in year incurred. |
| Maintenance costs (not an improvement or enhancement) (a) | Yes | Immediately deductible in year incurred. |
| Renovations | Yes (partially) | Depreciable as capital works. |
| Interest (b) | Yes | Immediately deductible in year incurred. |
| Advertising (for tenants) | Yes | Immediately deductible in year incurred. |
| Body Corporate fees and charges | Yes | Immediately deductible in year incurred. |
| Council rates | Yes | Immediately deductible in year incurred. |
| Water Rates | Yes | Immediately deductible in year incurred. |
| Land Tax | Yes | Immediately deductible in year incurred. |
| Cleaning/Gardening/lawn mowing. | Yes | Immediately deductible in year incurred. |
| Building and Pest inspections and Pest Control. | Yes | Immediately deductible in year incurred. |
| Insurance | Yes | Immediately deductible in year incurred. |
| Legal/Conveyancing. (c) | Yes (some) | Immediately deductible in year incurred. |
| Borrowing Fees (d) | Yes | Depending. Either, immediately deductible in year incurred or over loan term. |
| Depreciating Assets (e) | Yes | Depending. If under $300- Immediately deductible in year purchased or if over $300, depreciated over the assets useful life. |
(a) Repairs and maintenance
You can claim an income tax deduction for your costs in repairing and maintaining your rental property in the year you pay them. Repairs refers to work done on your property to make good or remedy defects in, damage to or deterioration of the property.
For example:
- replacing part of the guttering or windows damaged in a storm
- replacing part of a fence damaged by a falling tree branch
- repairing electrical appliances or machinery.
Maintenance refers to work done on your property to prevent deterioration or fix existing deterioration. For example:
- painting a rental property
- oiling, brushing or cleaning something that is otherwise in good working condition
- maintaining plumbing.
What are you unable to claim immediately?
You cannot claim the total costs of repairs and maintenance in the year you paid them if they did not relate directly to wear and tear or other damage occurring due to renting out your property. These are capital expenses you may be able to claim over a number of years as capital works deductions or deductions for decline in value.
(b) Interest expenses
You can claim the interest charged on the loan you used to:
- purchase a rental property
- purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
- make repairs to the rental property (for example, roof repairs due to storm damage)
- finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)
- purchase land on which to build a rental property.
You cannot claim interest:
- you incur after you start using the rental property for private purposes
- on the portion of the loan you use for private purposes (for example, money you use to purchase a new car or invest in a super fund)
- on a loan you used to buy a new home if you do not use the new home to produce income.
(c) Legal expenses
You can claim the cost of the following as income tax deductions:
- evicting a non-paying tenant
- expenses incurred in taking court action for loss of rental income
- defending a damages claim in respect of injuries suffered by a third party on your rental property.
You cannot claim the cost of the following as income tax deductions:
- solicitor’s fees for the purchase of the property (these are a capital expense)
- solicitor’s fees for the preparation of loan documents (these can be claimed as borrowing expenses)
- legal costs associated with resisting land resumption (these are a capital expense)
- legal costs associated with defending your title to the property (for example, defending an action by the mortgagee to take possession of the property where you have defaulted under the loan – these are a capital expense).
(d) Borrowing expenses
You can claim a deduction for borrowing expenses associated with purchasing your property, such as loan establishment fees, title search fees, and costs of preparing and filing mortgage documents. (Interest on the loan is not a borrowing expense, and can be claimed immediately.)
If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.
You can claim all of the following as borrowing expenses:
- stamp duty charged on the mortgage
- loan establishment fees
- title search fees charged by your lender
- costs (including solicitors’ fees) for preparing and filing mortgage documents
- mortgage broker fees
- fees for a valuation required for loan approval
- lender’s mortgage insurance, which is insurance taken out by the lender and billed to you.
You cannot claim any of the following as borrowing expenses:
- loan balances for the property
- stamp duty charged by your state/territory government on the transfer (purchase) of the property title
- legal expenses including solicitors’ fees for the purchase of the property (these are capital expenses)
- stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (you may be able to claim this as a lease document expense)
- insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
- borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to invest in a super fund).
Stamp duty and legal expenses may be included in calculating the ‘cost base’ of the property for capital gains tax (CGT) purposes as they are capital expenses.
If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment. If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year you had the loan.
(e) Depreciating assets
Depreciation is another tax benefit that property investors can claim as a deduction from their overall income. Depreciation is a generic accounting term used to describe how an asset declines in value over time. Depreciation of an investment property is based on its ‘useful life’, or the number of years a property is expected to be in use. Depending on the type of property and when it was built, a property’s useful life ranges from 25 years to 40 years. In some specific instances this period may be shorter.
Investment properties can depreciate in two ways. All investment properties experience depreciation in the form of ‘depreciating assets’. Depreciating assets include items such as:
- carpet
- ovens
- cooktops
- dishwashers
- clothes dryers
- blinds and curtains
- air conditioners
- heaters
- hot water systems
In the case of depreciating assets, depreciation is based on the acquisition cost of the item, which may vary in value depending on the type of asset. Carpet, for example, can vary in price and quality, and this will be reflected in the depreciation allowance. A depreciating asset is an asset that has a limited life expectancy (effective life) and can reasonably be expected to decline in value over the time it is used.
It doesn’t matter whether the depreciating asset installed in the property was new or used, or whether the property was new or not. The decline in value of a depreciating asset starts when you first use it, or install it ready for use. This is known as the depreciating asset’s start time.
For assets costing $300 or less, you can claim an immediate deduction for the entire cost (to the extent you use it for a rental property). You can’t do this if the asset is one of a set of assets that together cost more than $300 – for example, if you buy four dining chairs each costing $250, you can’t treat them as separate assets to claim an immediate deduction.
Selling a rental property.
You’re likely to make a capital gain or capital loss when you sell or otherwise dispose of a rental property. If you make a net capital gain in an income year, you’ll generally be liable for capital gains tax (CGT). If you make a net capital loss you can carry it forward and deduct it from your capital gains in later years.
A capital gain, or capital loss, is the difference between what it cost you to obtain and improve the property (the cost base), and what you receive when you dispose of it. Amounts that you’ve claimed as a tax deduction, or that you can claim, are excluded from the property’s cost base. The cost base of a capital gains tax (CGT) asset is generally the cost of the asset when you bought it. It also includes certain other costs associated with purchasing/acquiring, holding and selling/disposing of the asset.
If you acquired the property before CGT came into effect on 20 September 1985, you disregard any capital gain or capital loss. However, you may make a capital gain or capital loss from capital improvements made since 20 September 1985, even if you acquired the property before that date.
Property genuinely available for rent (property not tenanted, but available for rent).
Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent – that is:
- the property is advertised, giving it broad exposure to potential tenants
- considering all the circumstances, tenants are reasonably likely to rent the property.
The absence of these factors generally indicates the owner doesn’t have a genuine intention to make income from the property. Factors that may indicate a property is not genuinely available for rent include:
- it is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised:
- at your workplace
- by word of mouth
- outside annual holiday periods when the likelihood of it being rented out is very low
- the location, condition of the property, or accessibility of the property, mean it is unlikely tenants will seek to rent it
- you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out, such as:
- setting the rent above the rate of comparable properties in the area
- placing a combination of restrictions on renting out the property – such as requiring prospective tenants to provide references for short holiday stays and having conditions like “no children” and “no pets”.
- you refuse to rent out the property to interested people without adequate reasons.
Apportioning expenses
You’ll need to apportion your expenses to determine the deductible amounts if:
- your property is available for rent for only part of the year
- only part of your property is used to earn rent
- you rent your property at non-commercial rates.
If you prepay an expense, such as insurance or interest, that covers a period of more than 12 months, you may need to spread your deduction over two or more years.
Property available for part-year rental
If you use your property for both private and income-producing purposes, you can only claim a deduction for the portion of any expenditure that relates to the income-producing use. For example, with holiday homes and time-share units, you can’t claim a deduction for any expenditure related to those periods when the home or unit was used by you, your relatives or your friends for private purposes.
Only part of your property is used to earn rent
If only part of your property is used to earn rent, you can claim only that part of your expenses that relates to the rental income. As a general guide, apportion your expenses on a floor-area basis – that is, based on the area solely occupied by the tenant, together with a reasonable figure for their access to the general living areas, including garage and outdoor areas if applicable.
