Are you considering purchasing a rental property or do you already own one?
Rental income is an area that the ATO are constantly reviewing to ensure taxpayers are recording the correct income and expenses against your rental property so it pays to be especially careful.
What Income is Assessable for Tax Purposes?
Rental and other rental-related income is the full amount that you receive when you rent out your property. This can be paid direct to you or your agent. You must include your share of the full amount of rent you earn in your tax return.
Rental-related income includes:
- Bond payments you become entitled to retain
- Insurance payouts for loss of rent
- Reimbursements for deductible expenses (i.e. excess water usage or recoupment of repairs)
What Expenses are Allowable Deductions?
You can claim a deduction for expenses only if you actually incur them and they are not paid by the tenant.
Expenses for which you may be entitled to a deduction include:
- Advertising for tenants
- Bank charges
- Body corporate fees and charges
- Council rates
- Electricity and gas
- Gardening and lawn mowing
- Interest on loans
- Land tax
- Lease document expenses
- Legal expenses (excluding acquisition costs and borrowing costs)
- Mortgage discharge expenses
- Pest control
- Property agents fees and commissions
- Quantity surveyor’s fees
- Repairs and maintenance
- Secretarial and bookkeeping fees
- Security patrol fees
- Stationery and postage
- Telephone calls and rental
- Tax-related expenses
- Travel and car expenses
- Water charges
Interest on Loans
If you take out a loan to purchase a rental property you can claim a deduction for the interest charged on that loan. However, the property must be rented, or available for rental, in the income year for which you claim a deduction.
If you start to use the property for private purposes you can no longer claim a deduction for the interest you incur.
While the property is rented, or available for rent, you may also claim interest charged on loans taken out:
- To purchase depreciating assets
- For repairs
- For renovations
Some legal expenses incurred in producing your rental income are deductible. An example of this is the cost of evicting a non-paying tenant. However; most legal expenses are of a capital nature and are therefore not deductible.
Repairs and Maintenance
Expenditure for repairs you make to the property may be deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs generally involve a replacement or renewal of a worn out or broken part.
The following expenses are capital and are not deductible:
- Replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
- Improvements, renovations, extensions and alterations
- Initial repairs (remedying defects, damage or deterioration that existed at the date you acquired the property)
There may be situations where not all your expenses are deductible and you need to work out the deductible portion.
You will need to apportion your expenses if any of the following apply:
- 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
Can I Claim Capital Expenses?
You can claim a tax deduction for the decline in value of depreciation assets. The deduction for decline in value is calculated using either the prime cost or diminishing value method. Both methods are based on the effective life of the asset.
The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.
The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life.
You can also claim a deduction for certain kinds of construction expenditure which is referred to as a capital works deduction. Your total capital works deductions cannot exceed the construction expenditure.
In the case of residential rental properties the deductions would generally be spread over a period of 25 or 40 years.
What Records Do I Need to Keep?
You should keep records of both income and expenses relating to your rental property. The records must include:
- Name of the supplier
- Amount of the expense
- Nature of the goods or services
- Date the expense was incurred
- Date of the document
What Happens When You Sell Your Rental Property?
You may make a capital gain or loss when you sell a rental property that you acquired after 19 September 1985.
You will make a capital gain from the sale of your rental property to the extent that the capital proceeds you receive are more than the cost base of the property. You will make a capital loss to the extent that the property’s reduced cost base exceeds those capital proceeds.
To ensure you are correctly recording your rental property income and expenses you should consult a taxation specialist.
Please contact Altitude Advisory for more information.