The Australian Taxation Office (ATO) wants to remind property owners to carefully review their rental income claims this year. According to ATO Assistant Commissioner Tim Loh, when studying rental tax deductions for landlords, 90% of last year’s rental property tax returns contained errors.
Mr. Loh encourages landlords and their tax agents to double check deductions and income reporting for 2022. Common mistakes include forgetting to include all rental income or incorrectly claiming expenses and home renovation costs as deductions
It’s important to report all sources of rental income, such as short rentals, room rentals, insurance payouts, and retained bond money. Deductions should match your level of ownership and the legal property agreement.
Pro Tax Tip: You can’t deduct the same expenses twice or claim private costs as business expenses.
Landlords: How To Report Rental Income
Rental and income related to renting out your property that should be declared in your tax return includes all payments you receive or are entitled to, whether they are made directly to you or through your agent.
Your rental income also includes payments you receive or are entitled to when renting out part or all of your home through the sharing economy or offering your holiday home for rent.
These payments can take various forms, including goods and services. Should you receive goods in payment for rent, you should determine the market monetary value of these items.
Rental bond money should be included as declared income when you become entitled to retain it. This might occur if a tenant defaults on rent or if damage to your rental property necessitates repairs or maintenance. In some situations, insurance payouts may also need to be reported as income, particularly when they compensate you for lost rent. Letting or booking fees received should be considered part of your rental income.
Associated payments include all amounts you receive or are entitled to as part of your regular, repetitive, and recurrent efforts to generate profit from your rental property.
If you receive reimbursement or recoupment for deductible expenses, you might have to include these amounts as income. For instance:
- If a tenant pays you an amount to cover the cost of repairing damage to your rental property, and you can claim a deduction for the repair cost, you should include the entire amount in your income.
- If you receive a government rebate for the purchase of a depreciable asset like a solar hot-water system, you may need to include that amount in your income as well.
Landlords: Business versus private income
The ATO specifically asks owners to carefully apportion interest deductions for loans used partly for personal reasons. Only the portion related to earning rental income can be deducted. Mr. Loh reminds taxpayers that interest deductions are one of the most common errors.
Apportioning income from rental properties between business and private use can be a complex process, and it’s important to consult with a tax professional or accountant who can provide guidance tailored to your specific situation. However, here are some general principles to consider:
Keep Detailed Records: Maintain meticulous records of all income and expenses related to your rental property. This includes rental income, property management fees, maintenance costs, mortgage interest, property taxes, insurance, and any other relevant expenses.
Determine the Percentage of Business Use: Calculate the percentage of time your rental property is used for business purposes (e.g., as a rental property) versus private use (e.g., personal vacations). This calculation can often be based on the number of days the property is rented out for business purposes versus the number of days it is used for personal use.
Allocate Expenses: Allocate your rental property expenses based on a determined percentage. For example, if your property is used for business purposes 60% of the time and for private use 40% of the time, you would allocate 60% of your expenses as business expenses and 40% as personal expenses.
Document Business Use: Keep records to substantiate the business use of the property. This can include rental agreements, rental income receipts, and a log of rental periods.
Separate Bank Accounts: Consider maintaining separate bank accounts for your rental property income and expenses. This can help clearly delineate business and personal finances.
Consult with a Tax Professional: Tax laws and regulations can vary by jurisdiction, and there may be specific rules or deductions that apply to rental properties used for business purposes. A tax professional can provide guidance on how to maximize deductions and minimize tax liability.
Report Income and Expenses Correctly: When filing your tax return, accurately report the rental income and expenses based on the allocation determined. Be sure to use the appropriate tax forms and schedules for rental income reporting in your jurisdiction.
Keep Documentation: Retain all relevant documentation, receipts, and records in case of an audit or to substantiate your income and expense allocations.
Landlords: Property co-ownership
Co-ownership of rental property can involve different arrangements for sharing income and expenses, depending on the legal structure and the nature of the co-ownership. There are three primary scenarios to consider: joint tenants, tenants in common, and partnerships involved in the business of letting rental properties.
For co-owners who aren’t running a rental property business, income and expenses should be divided in line with their legal interests in the property. If they hold the property as joint tenants, each co-owner has an equal share. If they are tenants in common, they may have unequal shares, such as one holding a 20% interest and the other an 80% interest. Regardless of any agreements, whether verbal or written, income and expenses must be allocated according to these legal interests.
Pro Tax Tip: Interest on borrowed money used exclusively by one co-owner to acquire their interest in the property does not need to be shared among all co-owners.
For co-owners of investment properties who are not engaged in a rental property business, they are typically considered investors rather than active business operators. This distinction arises from the limited extent of their rental property activities and their level of involvement.
When co-owners are engaged in a partnership that operates a rental property business, the net rental income or loss must be divided according to the terms of the partnership agreement. This applies regardless of whether the legal interests in the rental properties differ from the partners’ profit and loss entitlements specified in the partnership agreement. In the absence of a partnership agreement, an equal division of net rental income or loss among partners is usually the practice.
Tax rules can be complex, and the specific deductions, exemptions, and reporting requirements of rental income can vary by location and personal circumstances. An ITP Accounting Professionals tax agent possesses the expertise to navigate these complexities, helping you maximize your deductions while ensuring full compliance with tax laws. Moreover, they can provide valuable guidance on record-keeping, saving you time and minimizing the risk of costly errors or audits. Phone 1800 367 487 and chat with a friendly professional today.