Rental Properties and Tax
Do you have one or more rental properties?
Are you thinking of purchasing an investment property now that the heat is starting to come out of the market?
Are you, like a lot of people in Sydney trying get on the property ladder by buying your first property as an investment then converting it to your main residence later on?
Did You Know That The ATO’s Rules For Rental Properties Have Changed?
As of July 1, 2017, the ATO changed a number of the rules governing what you can and can not claim as tax a deduction when it comes to the expenses incurred when you purchase and own a rental property.
To help you, we’ve read and summarised the important points in the ATO’s guide around rental properties. The complete document is linked in case you need a cure for insomnia. Also because the ATO may take down the guide in the future.
The most interesting part of the document for us starts on page 9 and goes into the different types of expenses you’ll encounter and whether they are tax deductible and when you can claim them.
The 3 Type of Rental Expenses
There are three categories of rental expenses. Those for which you:
- Cannot claim any deductions
- Can claim an immediate deduction in the income year you incur the expense
- Can claim deductions over a number of income years
1. Expenses For Which You CANNOT Claim Deductions
The following are the expenses for which you are not able to claim deductions. These include:
- Acquisition and disposal costs of the property. These are outlined more below. While you can not claim them against your property’s rental income, they go in to form your cost base when calculating Capital Gains Tax when it comes time to sell the property
- Expenses not actually incurred by you, such as water or electricity charges or any expense borne by your tenants (renters)
- Expenses that are not related to the rental of the property. These include:
- Expenses connected to your own use of a holiday home that you rent out for part of the year, or
- Costs of maintaining a non income producing property used as collateral for the investment loan
Other expenses for which you are not able to claim deductions include:
- Travel expenses to inspect a property before you actually buy it
- Expenses incurred in relocating assets between rental properties prior to renting
- Expenses for rental seminars about helping you find a rental property to invest in
You are not entitled to a deduction for travel expenses relating to your residential rental property incurred from
1 July 2017, unless you are using the property in carrying on a business or you hold it through an “excluded entity” which is typically a Corporate tax entity or an Investment or Unit Trust.
Travel expenses include the costs of travel to inspect, maintain or collect rent for the property, and the costs of meals and accommodation related to such travel. If your travel expenses also relate to another income producing activity, you will need to apportion the expenses on a fair and reasonable basis.
No More Claiming Depreciation On Fixtures and Fittings
From 1 July 2017, you may not claim a deduction for a decline in value of certain second-hand depreciating assets against your residential rental property income unless you are using the property in carrying on a business, or you own the property through an “excluded entity” (a Corporation or Unit Trust).
Going forward, you can only claim depreciation on fixture and fittings (kitchen appliances, curtains and so on) if they are brand new.
Acquisition and Disposal Costs
You cannot claim a deduction for the costs of acquiring or disposing of your rental property, such as:
- The purchase price of the property
- Fees on bank guarantees in lieu of deposits or similar
- Conveyancing costs
- Advertising expenses when you come to sell
- Fees for the services of a buyer’s agent you engage to find you a suitable rental property to purchase, including where the agent recommends a property manager free of charge as an optional or supplementary service
- Fees for the services of a real estate agent to help you sell the property
- Stamp duty on the transfer of the property (but not stamp duty on a lease of property;
Having said this, the costs above go towards forming your cost base of owning the property for CGT purpose.
2. Expenses For Which You CAN Claim an Immediate Deduction
Expenses for which you may are entitled to an immediate deduction in the income year you incur the expense include the following:
- Advertising for new tenants
- Bank fees and charges
- Body corporate fees and charges
- Cleaning costs
- Council rates
- Electricity and gas charges
- Annual power guarantee fees
- Gardening and lawn mowing costs
- In-house audio and video service charges
- Insurance costs including policies covering building, home and contents or public liability
- Interest on loans
- Land tax
- Lease document expenses. These are charges on preparing and executing lease contracts and include;
- Preparation fees
- Registration fees
- Stamp duty
- Legal expenses excluding contract reviews when you bought the property and other acquisition costs, as well as borrowing costs discussed above
- Mortgage discharge expenses
- Pest control costs
- Property agents fees and commissions. This includes the period prior to the property becoming available to rent
- Quantity surveyor’s fees to draw up any depreciation schedules
- Costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time
- Repairs and maintenance costs
- Cost of a defective building works reported in connection to repairs and maintenance conducted
- Secretarial and bookkeeping fees incurred
- Security patrol fees
- Servicing costs, for example, servicing a water heater or gas systems
- Stationery and postage
- Telephone calls and line rental
- Tax-related expenses – these are expenses incurred in preparing your submission to the ATO
- Travel and car expenses to the extent that they are deductible. Please see previous section on what is counted as a travel expense
- Water charges
Pleas note, you can claim a deduction for these expenses only if you actually incur them, and they are not paid by your tenant.
3. Expenses Deductible Over a Number of Years
There are three types of expenses you may incur for your rental property that may be claimed over a number of income years going forward:
- Borrowing expenses. This is the cost of your home or investment loan dedicated to the rental property in question
- Amounts for decline in value of depreciating assets (allowed only in certain circumstances). Typically this is for new fixtures and fittings you installed (or bought new) for the property
- Capital works deductions
Let’s have a look at these categories in detail.
Borrowing Expenses
These are expenses directly incurred in taking out a loan for the property. They include:
- Loan establishment fees
- Title search fees charged by your lender
- Costs for preparing and filing mortgage documents
- Mortgage broker fees
- Stamp duty charged on the mortgage
- Fees for a valuation required for loan approval
- Lender’s mortgage insurance billed to the borrower
The following are not borrowing expenses:
- Insurance policy premiums on a policy that provides for your loan on the property to be paid out in the event that you die or become disabled or unemployed
- Interest expenses. These are claimed in the year they fall due
- Stamp duty charged on the transfer of the property
- Stamp duty incurred to acquire a leasehold interest in property (such as an ACT 99-year Crown lease)
If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year they are incurred.
If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year the loan is repaid in full. If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year that you held the loan.
We hope this all makes sense. If you have any questions, please don’t hesitate to call us and ask questions. And with all things tax, the best to consult with your Accountant.
