Rental expenses you can and can’t claim
With a new financial year upon us, for landlords, it is good to learn what expenses you can claim as a deduction for your rental property.
By maximising your tax deductions you can save a lot of money but it is important to fully understand what expenses you can claim – and what you can’t.
In that case, we have turned to the ATO for this month’s monthly tip on rental expenses to claim.
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Rental expense categories
There are three rental expense categories. The ATO says it is important to claim each expense under the correct expense type for tax purposes.
- Rental expenses you can claim in the income year you incur the expense for your rental property
These expenses may include advertising for tenants, body corporate administrative fund fees and charges, council rates, water charges, land tax, cleaning, gardening and lawn mowing, pest control, insurance (building, contents, public liability, loss of rent), interest expenses, pre-paid expenses, property agent’s fees and commission, repairs and maintenance and legal expenses.
However, there are rules around what can and can’t be claimed for some of these expenses so see the ATO website here for more information.
You can claim an immediate deduction for these expenses in the income year you incur them but you must actually incur the cost, you can’t claim a deduction where the cost is paid by the tenant.
There are some rental expenses that you must claim over several years such as capital works and borrowing expenses, for example.
2. Rental expenses you can claim a deduction over several years
These expenses include borrowing expenses, capital expenditure, capital allowances and initial repairs.
Borrowing expenses you can claim a deduction for include loan establishment fees, lender’s mortgage insurance (insurance taken out by the lender and billed to you), title search fees charged by your lender, costs for preparing and filing mortgage documents (including solicitors’ fees), mortgage broker fees, fees for a valuation required for loan approval and stamp duty charged on the mortgage.
You can’t claim a deduction for capital expenditure generally, however, in some circumstances, you may be able to claim capital expenses incurred relating to your rental property over a number of years such as capital works, improvements and substantial renovations.
Under the uniform capital allowance rules, you can claim a deduction for the decline in value of depreciating assets used for income-producing purposes.
Depreciating assets are those items that don’t form part of rental property premises. Premises refers to the actual structure of the rental property’s building. An example of a depreciating asset would be a dishwasher in a rental property that is rented or genuinely available for rent.
Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property can’t be claimed as an immediate deduction but may be claimed over a number of years as capital works deductions.
Again, there are rules and regulations around each of these so see the ATO website here for more information.
3. Rental expenses you can’t claim a deduction for
These are the expenses you can’t claim as a deduction for your rental property and include personal expenses, including expenses arising from your personal use of the property, some expenses of a capital nature and the purchase of second-hand (or used) depreciating assets.
Borrowing expenses are expenses you directly incur in taking out a loan for the purchase of your rental property.
Borrowing expenses you can’t claim include the amount you borrow for the property, loan balances for the property, interest expenses (as these are claimed separately), repayments of principal against the loan balance, stamp duty charged by your state or territory government on the transfer (purchase) of the property title (as this is a capital expense), legal expenses including solicitors’ and conveyancers’ fees for the purchase of the property (as this is a capital expense), stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (but you may be able to claim this as a lease document expense), insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (as this is a private expense) and borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to buy a car).
Second-hand or used depreciating assets are depreciating items previously used or installed and ready for use by you or another entity. Usually, they are things that were existing in either a property when you purchased it or your private residence that you later rent out. You can’t claim a deduction for the decline in the value of assets in an existing residential rental property.
For more information about these expenses and exceptions (when you can claim) see the ATO website here for more information.
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Claim the right amount of expenses
The amount of the expense that relates to your income-producing activities will need to be worked out if your property is only genuinely available for rent for part of the year or you use your property for personal purposes for part of the year or you only use part of your property to earn rent or you rent your property at non-commercial rates (less than market rates) or you partially use your investment loan for personal purposes.
You may need to decide which of your expenses are private in nature and expenses that relate solely to renting out the property, such as advertising for tenants and real estate commissions, do not need to apportion, these are fully deductible in the year they are incurred.
To learn more about expenses see the ATO website here.
Positive or negative gearing
A rental property is ‘positively geared’ if deductible expenses are less than the income earned from the property. For example, you make a profit from renting out your property.
A rental property is said to be ‘negatively geared’ if deductible expenses are more than the income earned from the property.
The overall tax result of a negatively geared property is a net rental loss and in this case, you may be able to claim a deduction.
To learn more about positive or negative gearing see the ATO website here.
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Rental expenses and your tax return
Rental expenses you can claim a deduction for are included in your tax return.
These expenses are added to your tax return in the ‘rental expenses’ fields.
To learn more about rental expenses and your tax return see the ATO website here.
With all this in mind, you’ll know what you can and can’t claim for your rental property going into the new financial year.
Information provided in this article is general in nature and does not constitute tax or financial advice.
