Have you bought a property with the intention of renting? Maybe you’ve moved to a new home and decided to rent out your previous home instead of selling it? Whatever your situation may be, it’s an excellent idea to wrap your head around the rental expenses you can claim as deductions on your tax return. This information could save you thousands, so read on for all the details.
Is Your Rental Property Positively or Negatively Geared?
You’ll need to understand if your property will be positively or negatively geared as this will impact your tax claims. Positive gearing means the income you earn from renting your property is higher than your expenses. In other words, you make a profit from your rental.
Negative gearing means your expenses outweigh the income you earn from the property. If this is the case, you’ll be able to claim a deduction for your rental expenses. This will reduce the total taxable amount of your rental income and any other income you earn, such as salary wages or business profits.
Pro Tax Tip: If your other income is not enough to absorb the cost, then the loss can be carried forward into the next income year. Sound a bit complicated? ITP’s tax accountants can help you ensure you squeeze the maximum benefit out of your negatively or positively geared property. Use our handy office locator to find your nearest branch.
What Expenses Can You Claim This Year?
A lot of expenses can be immediately claimed as tax deductions. Some, you will claim on one tax return and then be done with them. Other rental expenses, such as depreciation, can be claimed over several years. Then, of course, there are some expenses that may not be claimed at all.
Rental expenses you can claim include:
- Advertising for tenants;
- Body corporate fees and charges;
- Borrowing expenses (incurred from directly taking out a loan for the purchase of your rental property – claimed over five year period or 20% each year);
- Council rates;
- Water charges;
- Land tax;
- Cleaning costs;
- Gardening and lawn mowing;
- Pest control;
- Insurance (building, contents, public liability);
- Interest expenses;
- Pre-paid expenses;
- Property agent fees and commissions;
- Income protection insurance;
- Repairs and maintenance;
- Some legal expenses;
- Accounting and tax agent fees.
Pro Tax Tip: You can only claim expenses you incurred, not costs your tenant covered.
Which Expenses Are You Not Allowed to Claim?
Unfortunately, you can’t claim every associated cost as a rental property expense. These include capital expenses (expenses incurred purchasing and selling your property), depreciating assets, and a few other items.
Pro Tax Tip: If you can include capital expenses in the cost base of your property, it may help you reduce the amount of Capital Gains Tax (CGT) you pay when you sell your property.
You cannot claim the decline in value of an existing property if you signed the contract for purchase on or after 7:30 pm (AEST) on 9 May 2017. If you used a home you moved out of as a rental on or after 1 July 2017, you cannot claim depreciated deductions on items that were already in your home. You can only claim new items installed for the rental property.
There are some exceptions to these rules. So it’s worth speaking with a tax professional to discuss your individual circumstances. For more details on what you can and can’t claim, including how to go about making your claims, check out our guide covering How To Claim Tax Deductions for Rental Properties.
Can You Deduct Interest Expenses on a Rental Property?
If you take out a loan to purchase your rental property, you may be able to claim the interest charges on that loan as a tax deduction.
Pro Tax Tip: To be eligible to claim interest on your loan, you must have rented your property or put it on the rental market in the same income year. You won’t be able to claim interest on the time you used the property for private purposes. Nor can you claim for any portion of the loan you used for private purposes.
Which Interest Expenses are Eligible?
You can claim the interest charged in the loan you used to:
- purchase a rental property;
- purchase a depreciating asset for the rental property (this may be for a new air conditioner, heating system, or hot water system);
- make repairs to the property (e.g. roof repairs after a storm);
- finance renovations on your rental property.
Pro Tax Tip: You’ll also be able to claim interest on pre-paid claims up to 12 months in advance.
Can You Claim Pre-Paid Expenses on Your Tax Return?
If you’ve paid insurance that extends beyond the income year, for example, you’ll generally be able to claim an immediate deduction. This is true for most pre-paid expenses of less than $1,000. The rule also covers expenses of $1,000 or more where the service extends for less than 12 months. If your pre-paid expense doesn’t meet the criteria, you may need to spread it out over two or more years. Once again, it’s best to talk to a registered tax agent to ensure you’re getting the best result when claiming rental expenses.
Can You Claim Rental Property Repairs and Maintenance?
Careless tenants, normal wear and tear, environmental damage – all of these factors can leave you needing to do some work on your rental property before you can bring in new tenants. You can generally claim repair and maintenance costs in the same year you incurred them. However, to be eligible, the expenses must directly relate to damage that occurred as a result of renting or repairs required between tenants.
There are three areas in which you may allocate your expenses. These include:
- Repair and Maintenance
- Capital Works
- Capital Allowance
Repairs are expenses incurred to fix defects, damage, or deterioration to your property. They must direct arise from your rental in order to be claimed. These types of repairs include things like replacing broken windows, replacing storm-damaged gutters, and repairing electrical appliances or machinery.
Maintenance expenses are costs incurred to prevent damage or deterioration. These expenses cover things like repainting, maintaining a deck, and plumbing.
If you’re looking at replacing part of a fence damaged in a storm or paying a plumber to fix a leaking tap, you’ll likely need to classify the expenses as repairs. This means you’ll claim them as a Repair and Maintenance expense. If you’re fixing or preventing the deterioration of an item on your rental property, such as painting or installing a deck, this will be a maintenance expense. That means you’ll claim it in the Repair and Maintenance category.
If you’re fixing damage to a property that existed when you bought your rental, such as fixing floorboards, this expense is likely to be classed as an initial repair. You should then be able to claim it as Capital Works and as a Capital Allowance on your rental schedule. If the structure you’re replacing is only partially damaged, you’ll be able to claim your expense as Capital Works.
If you’ve installed a brand-new appliance or floor/window covering, you’ll generally be able to claim it as a depreciating asset as part of the Capital Allowance in your rental schedule.
Can You Claim Improvements to a Rental Property?
An improvement covers anything you do to your rental property to make it more valuable and desirable. It also includes any change you make to the character of your property. These types of expenses include remodelling a bathroom or adding a pergola. To classify as an improvement, the expense must add something new, further increases the earning potential of your property, and go beyond restoration.
Pro Tax Tip: You can’t claim a tax deduction for the total cost of improvements to your rental property in the year you incurred them.
If the work done on your property is a mix of repairs and improvements, you’ll only be able to claim an income tax deduction on your repair expenses if you can separate the costs from the improvement.
Pro Tax Tip: If you hire a contractor, make sure they understand where you are allocating costs so they can provide an itemised invoice.
Deducting your expense claims on a rental property can become complex. It’s important to understand and allocate your expenses so you can claim them correctly and make the most out of every tax return. The difference could mean thousands.
As Australia’s trusted Income Tax Professionals, ITP has been helping Australian individuals and businesses for 50 years and counting. We know the tax system intimately and can help you achieve the best result, year after year, with your rental property. Speak with an ITP Accounting Professional today, and discover new ways to save big on your tax returns. Phone 1300 367 487 or book online.