You can claim a deduction in the income year you incur expenses for your rental property that relate to the management and maintenance of the property, including interest on loans. It is important to know what tax deductions you can claim on your investment property.

If your property is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income – such as salary and wages and business income.

You can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.

Expenses you may be entitled to claim an immediate deduction for in the income year you incur them may include:

      • advertising for tenants
      • body corporate 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
      • legal expenses.
Interest expenses

Charges on the principal amount of the loan that you take out for a rental property are known as interest expenses. The principal amount is the money you borrow from your bank or lender.

If you take out a loan to purchase a rental property, you can claim a deduction for the interest charged on the loan or a portion of the interest.

The property must be rented or genuinely available for rent in the income year you are claiming a deduction for the interest expenses.

What you can claim

Here are the rental expense you can claim. You can claim the interest charges on the loan (mortgage) you use to:

      • buy a rental property
      • buy a depreciating asset for the rental property (for example, an air conditioner for the rental property)
      • make repairs to the rental property (for example, roof repairs due to storm damage)
      • finance renovations and extensions to the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property).

You can also claim interest expenses when:

      • you have pre-paid interest expenses up to 12 months in advance
      • you’re repairing damage to your rental property, making it uninhabitable while the repairs are taking place.
What you can’t claim

You can’t claim a deduction for interest expenses you incur:

      • for any period you used the property for private purposes, even if it’s a short period of time
      • on the portion of the loan you use for private purposes (for example, money you use to purchase a new family car),
      • with a loan you used to buy a new home if you don’t use the new home to produce income, even if you use your rental property as security for the loan
      • on any portion of the loan you use for private purposes, even if you are ahead in your repayments.
Loan accounts used for private and rental expenses

If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and is used for both private purposes and rental property expenses, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan. You can’t repay only the portion of the loan that relates to the personal purchase. Any repayments of the loan are apportioned across both purposes.

You must also separate the interest that relates to the rental property from any interest that relates to the private use of the fund.

Pre-paid expenses

A pre-paid expense is a cost you incur under an agreement for services to be done (in whole or in part) in a later income year. For example, payment of an insurance premium on 1 January that provides cover for the entire calendar year or interest on money you borrow.

You can generally claim an immediate deduction in the income year you make the prepayment in for:

      • expenses of less than $1,000
      • expenses of $1,000 or more where the service period is 12 months or less (such as payment of an annual insurance premium part way through an income year).

The service period is the period during which the thing is to be done under the agreement in return for the expenditure.

Repairs and maintenance

Repair and maintenance expenses are those costs you incur to:

      • keep your property in a tenantable condition
      • fix wear and tear or damage that occurs as a result of renting out your property.

To be a deductible expense, the property must either:

      • continue to be rented on an ongoing basis
      • remain genuinely available for rent but there is a short period where the property is unoccupied – unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.

You can claim repair and maintenance expenses in the income year you incur them.

However, you can’t claim expenses as repairs and maintenance which are capital or of a capital nature. For example, replacement of an entire structure such as a fence or initial repairs such as defects that existed at the date you acquired the property.

Travel costs

Travel expenses related to a residential rental property are also not deductible. Travel expenses include the costs you incur on car expenses, airfare, taxi, hire car, public transport, accommodation and meals to:

      • inspect, maintain or collect rent for your rental property
      • travel to any other place as long as it is associated with earning rental income from your existing rental property (for example, visiting your real estate agent to discuss about your current rental property).
Most common mistakes

The ATO has provided some rental deductions tips for tax practitioners assisting their clients:

      • apportion deductions according to the share of ownership
      • taxpayers can only claim expenses for a rental property that are incurred in producing rental income
      • check if there are any periods when the property wasn’t being used to produce income
      • ensure deductions for the property expenses are reduced for periods your clients
      • use or reserve the property
      • allows friends or family to rent it at mates rates
      • have unreasonable conditions on the property
      • record deductions for each rental property separately
      • check if repairs or maintenance should be capital works that need to be claimed over a period of time
      • set up a depreciating asset schedule to keep track of certain items.

As such, we have an article relating to how the ATO will look closely on rental property claims. So you’ve got your bases covered and know more abou rental expenses you can claim.

For further insight, feel free to contact us at Financially Sorted. Call us on (03) 9888 3175 or email us on [email protected]