What you can and can’t claim on your investment property

The rent you earn on your investment property is assessable income and must be declared on your tax return each year. But as a rental property owner, you also have access to a huge number of deductions. But those tax deductions can be very confusing and difficult to understand. In this blog post we will look at the basics, and explore what you can and can’t deduct as an expense or as depreciation.

In general, deductions can only be claimed if they were incurred in the period that you rented the property or during the period the landlord is actively looking for a tenant. The basic rule is that there needs to be a relationship between the money you make and the deductions you claim. There are many different tax deductions that become available when you invest in rental property. Let’s take a closer look at them and the value they can bring to your tax deductions.
Interest on bank loans

Only the interest on repayments for investment property loans, and bank charges, are deductible – not the actual loan itself.

Rental expenses

When you own rental properties, there are multiple different expenses you can claim to offset the amount of tax you pay each financial year. Generally, you can claim any cost that fall under 4 categories:

  • Repairing your property – work to make good or remedy defects in, damage to, or deterioration of the property;
  • Maintaining your property – work to prevent deterioration or fix existing deterioration;
  • Managing your property – day-to-day stuff what you do when you own the property;
  • Improving your property – work done to rental property that will increase the amount of rent you charge, increase the life of the property, or anything that goes beyond just fixing or repairing something.

Some of these you can claim immediately, some over time. The most common expenses you can claim immediately include:
advertising for tenants, body corporate fees and charges, council rates, water rates, land taxes, cleaning, gardening, pest control, insurance, property agent fees and commissions, property repairs and maintenance, bookkeeping costs, pool maintenance, stationery & postage.

Expenses you can claim over time include: stamp duty on loans, loan set up fees, fees for title searches, solicitor fees related to loans, broker fees, valuation fees, mortgage insurance, depreciation of capital items over $300 purchased by you (eg washing machines), capital works.

Repairs, maintenance or capital works?

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, such as replacement of an entire asset or improvements or additions to the property, is generally spread over a number of years.

As long as costs relate to ongoing maintenance while the property is rented or available for rent, you claim the cost of repairs and maintenance the same tax year that you carry them out.

Depreciation of buildings

General wear and tear is inevitable for buildings, just as it is for vehicles and other assets. This process affects the financial value of items and is referred to as “depreciation”.
When it comes to investment properties, depreciation is one of the best things for your bottom line at tax time. The depreciated value of the building is calculated and claimed on your tax return as what’s known as a “non-cash deduction”.

Depreciation of fittings

This tax deduction follows similar guidelines to the depreciation of building claims, but relates specifically to fittings inside an investment property. This includes things like lights, fans, power points, windows, sinks, showers, and so on, which are all subject to wear and tear – or depreciation – over time. Depreciation rates can range from 2.5% to 4% of the price paid for buildings and their assets, so it often leads to some significant ongoing tax deductions.

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.

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.

What you can’t claim?

There are a few things the ATO doesn’t let you claim. These include:

  • Any type of personal use of the rental property
  • Utility bills paid by tenant
  • Expenses to inspect property before you buy it (eg pest and building inspection)
  • Expenses for self-education on investment (eg seminars on how to buy an investment property)
  • Costs that incur buying or selling a property (that includes advertising, and stamp duty costs)

We hope this post gave you a better understanding on what you can and can’t claim on your investment property. If you would like to learn more and create your own wealth through property, contact our team today for specific advice suited to your situation!