Smart Tax Advantages Owning a Rental Property
Are you thinking about owning a rental property in Australia? Or maybe you are already a proud owner of one down under. Either way, you must know that rental properties are tax deductible from the day you first buy the property. Purchasing a rental property in Australia can be a financially rewarding experience despite the outlay of a large amount of cash.
With some tax knowledge and a little professional advice you can claim most of the expenses involved in owning a rental property. Below we have listed 3 ways in which you can claim tax deductions from ATO (Australian Taxation Office) relating to your rental property in Australia.
There may be situations where you need to apportion between deductible and non-deductible expenses. Examples include:
- If the property is not available for rent for the full year, you may need to apportion some of the expenses on a time basis.
- If only part of the property is used to earn rent, you can claim only that part of the expenses that relates to the rental income. As a general guide, apportionment is made on a floor area basis.
- If you combine travel to inspect or maintain your rental property with travel for private purposes, you may need to apportion your travel expenses.
Expenses that you may be able to claim include:
- advertising for tenants
- body corporate fees
- bank charges
- electricity and gas
- gardening and lawn mowing
- in-house audio/video service charges
- interest on loans
- land tax
- legal expenses lease costs
- pest control
- property agent’s fees and commission
- quantity surveyor’s fees repairs and maintenance
- secretarial and bookkeeping fees
- security patrol fees
- servicing costs,
- eg water heater
- stationery and postage
- telephone calls and rental
- tax-related expenses
- travel and car expenses
- water charges
You can claim a deduction for these expenses only if you actually incurred them.
1. Claim Credit for Mortgage Expenses
Did you know that you could actually claim mortgage expenses as tax deductions if you opt for a rental property, (and yes, this includes interest charges too which are deducted immediately)? Yes, ATO allows you to deduct borrowing expenses like loan establishment fees that you paid, the cost of preparing and filing documents, and of course, the title search fee if they are above $100.
Before you are handed over ownership of the mortgaged property, you are required to pay for mortgage insurance and property valuation fees; however, the good news is that you can claim deductions on these as well. The borrowing expenses on rental properties are deducted over a period of 5 years or the term of the loan, whichever is less.
On the other hand, there are certain mortgage expenses that you cannot claim with the ATO.
- Stamp duty charged by the state or territory where the property is located
- You are not allowed to set off fees paid to the solicitor for preparing mortgage documents
- Legal costs relating to resisting land resumption
- Costs paid for defending your title of property3.
Non-deductible legal expenses may, however, form part of the cost base of your property for capital gains tax purposes.
The most common rental property deduction happens to be the interest itself. However, the property must be available for rent in the exact same income year. Remember you cannot claim interest if you are not using the property to produce income4.
If you take out a loan to purchase land on which to build a rental property, the interest on the loan will be deductible from the time you took it out. However, if your intention changes and the property is not used to produce rent or other income, you cannot claim the interest after your intention changes.
You may also claim interest charged on loans taken out:
- to purchase depreciating assets, or
- for renovations, or
- for repairs to the property required due to you using it to produce rental income.
There may be a point that you are not able to claim a deduction if the loan is used to further generate income.
If a loan is taken out to purchase a rental property and you start to use the property for private purposes, you cannot claim any interest expenses you incur after that time.
You may want to borrow money to buy a new home and then rent out your previous home. If there is an outstanding loan on the old home and the property is used to produce income, the interest outstanding on the loan, or part of the interest, will be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income. This is so whether or not the loan for the new home is secured against the former home.
2. Deductable Repairs on Your Property
You can also claim deductions for costs you pay to maintain or repair the rental property during the year they are incurred.
Sometimes repairs call for replacement or renewal of parts installed in the rental property. For example, replacement of a portion of the fence that was damaged due to a fallen tree branch. Now when you buy a property and realize that there are some initial repairs that you need to make, like replacing a termite-infested floorboard, or changing the pipes, you will be making these repairs to give away the property for rent. So you cannot claim deductions on any of these repair expenses. The reason is that the wear and tear did not occur due to renting out the property. When the renters vacate from your property and you find that you have to make new repairs, this is the time that you can claim deductions because the damages occurred during the tenants stay at your property.
That being said, you can claim the following capital work expenses as tax deductions if the property is made after 17 July 1985:
- the cost of capital improvements to the surrounding property
- the cost of altering a building
- building construction costs
Building costs for the repairs that you will make to your kitchen or your bathroom, for instance, are deductible at 2.5% a year and for 40 years.
Click here if you want to know how to fund your renovation.
3. Claim Depreciation
You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held at any time during that year. However, your deduction is reduced to the extent you use it or have it installed ready for use for other than the purpose of producing assessable income – for example, a private purpose.
Types of Depreciating Assets
- Blind, Venetian Carpets
- Curtains and drapes
- Electric bed
- Electric clock
- Electric heater
- Furniture and fittings
- Garbage unit, compacting
- Hot water service
- Lawn mowers – motor/self-propelled
- Washing machine
- Linoleum & similar floor covering
- Microwave oven
- Television set
- Vacuum cleaner
Some items in a rental property are regarded as part of the setting for the rent producing activity and do not qualify as separate assets in their own right. However, a capital works deduction may allow for some of these items.
Examples of items not treated as separate assets in their own right are:
- door and window fittings driveways and paths
- floor and wall tiles garages and non-portable sheds
- in-ground swimming pools, saunas, spas plumbing and gas fittings
- built-in kitchen cupboards clothes hoists
- sinks, tubs and baths, and wash basins and toilet bowls.
- reticulation piping roller door shutters
- roof top ventilators and skylights security doors and screens
It has been the longstanding practice to treat the initial purchase of certain assets as not depreciable, but to allow claims for an immediate deduction for the cost of their replacement. The practice principally related to low-cost items that had very long or indeterminate lives that were difficult to keep track of, and were subject to frequent replacement through loss or breakage – for example, crockery, bedding, linen.
You can claim an immediate deduction for a depreciating asset costing $300 or less if you use the asset predominantly to produce assessable income that is not from carrying on a business – including rental income.
Note: This is a guide only and you should contact your accountant to discuss your individual situation.