Tax - What can you claim and what doesn't qualify?
Article Courtesy of Australian Property Investor Magazine - 30 June 2010
Get all your rental property claims straight with a clear guide on tax deductions courtesy of the Australian Tax Office itself.
The Australian Tax Office (ATO) says more than 1.3 million people claimed nearly $25 billion in rental deductions in their tax returns last year.
The following information on what rental property owners can claim comes direct from an ATO fact sheet, so investors can be sure they've got their claims correct.
What can I claim as an immediate deduction?
There are a number of rental property expenses that can be claimed as an immediate deduction. These include:
interest on a loan to:
- purchase a rental property or purchase land to build a rental property;
- purchase a depreciating asset for the property like an air conditioner;
- finance renovations like a deck;
- make maintenance repairs or repair damage to the property;
repairing part of the guttering or windows damaged in a storm or repairing part of a fence damaged by a falling tree branch;
maintaining plumbing, repairing electrical appliances or machinery as well as painting, oiling, brushing or cleaning something that is otherwise in good working condition;
preparing a lease agreement with your tenant;
evicting a tenant.
What needs to be claimed over a number of years?
Expenses that are deductible over a number of years include the cost of depreciating assets and structural improvements and most borrowing costs.
When you purchase a rental property you also purchase depreciating assets that are part of the property such as stoves, air conditioning and hot water systems. The cost of these items can be claimed over a number of years as a 'decline in value' deduction.
You can also claim a capital works deduction over a number of years (normally 25 years) for the building construction, plus any subsequent improvements made by you or a previous owner.
Some other examples of expenses that need to be claimed over a number of years include:
The cost of repairing defects, damage or deterioration that existed when you obtained the property.
A deduction for the total cost of 'improvements' to your rental property that might otherwise be described as a repair. An improvement is something that provides something new, or goes beyond just restoring the efficient functioning of the property. These can normally be claimed as capital works deductions over 25 years.
If you have to replace something (such as a complete fence or building, a stove, kitchen cupboards or a refrigerator) you have not carried out a repair that is deductible immediately. You need to claim them as deductions for decline in value or as capital works deductions over the relevant period.
Borrowing costs, which can include:
- stamp duty charged on the mortgage;
- loan establishment fees, fees for a valuation required for loan approval and lenders mortgage insurance;
- title search fees charged by your lender, costs of preparing and filing mortgage documents and mortgage broker fees.
If these amounts are less than $100 in total they can be deducted immediately, otherwise they are generally deductible over five years or over the term of the loan, whichever is less.
What can't be claimed?
To help you avoid some common mistakes here's a list of things you can't claim:
Deductions for rental properties that are not genuinely available for rent.
Interest on a loan you use to buy a home that you don't use to produce income or when you start using the rental property for private purposes.
Interest on the portion of the loan you use for private purposes like buying a new car.
Travel expenses when the main purpose of the trip is a personal holiday.
Stamp duty charged by your state/territory government on the transfer of the property title or leasehold interest.
Insurance premiums where under the policy your loan will be paid out in the event that you die, become disabled or unemployed.
Borrowing expenses or interest on the portion of a loan you use for private purposes.
Solicitor's fees for the purchase of the property and the preparation of loan documents.
Eureka! Comment: This article is to be used as a guide only and we would encourage you to discuss your personal situation with your tax advisor or accountant to ensure you have fully maximised your deductions. Their small fee could save you thousands!