Navigating the dos and don’ts of investment property returns.
Rental properties and holiday homes are once again in the sights of the Australian Tax Office, which has had growing success identifying erroneous claims.
Last year about 70 per cent of returns related to investment properties audited by the ATO had to be amended, most often because of incorrect expenses or earnings claims.
Regulators have ramped up digital data matching from online platforms such as Airbnb to keep a closer eye on the booming sector. But be careful not to short-change yourself either. There are some claim areas investors regularly overlook too.
So, as we run down to the end of the financial year, it’s a good time to brush up on the dos and don’ts of claiming for a rental property.
Money in vs money out
Property investors can claim costs associated with leasing and maintaining an investment property. This includes borrowing expenses and interest, but not principal on loans.
However, investors must also declare all income earned renting the property out, and expenses can only be claimed for the period it was leased or genuinely available for rent. If you earned more than you spent in any given financial year, your property is positively geared. If you earned less, it is negatively geared, and your losses can be offset against other income streams.
What can you claim and when?
Most ongoing expenses can be claimed in the year they’re incurred including:
- Mortgage interest.
- Council rates and water charges.
- Cleaning, gardening and pest control.
- Body corporate fees.
- Advertising and property agent charges (including photography for rental listings).
- Banking and bookkeeping fees for accounts used for rent and upkeep payments.
- Repairs and maintenance including appliances to keep the property in a tenantable condition, such as replacing a damaged fence.
- Security costs (new keys cut).
- Depreciating assets under $300.
Some major, or one-off, expenses can only be claimed over several years and they include:
- Depreciation on construction costs (if a home is post-1985), or depreciation on more recent major structural improvements.
- A specialist quantity surveyor can help with this.
- Borrowing costs of more than $100 (such as loan establishment fees, lenders mortgage insurance, search fees, solicitor and mortgage broker fees).
- Depreciating assets over $300 such as new (but not second-hand) fridges, washing machines, dryers and carpeting.
Initial repairs. If you bought a property that had defects or damage, addressing this is classed as capital work and must be deducted over several years. This is unlike repairs due to wear and tear of ongoing rental that can be claimed in the year the expense is incurred.
What you can’t claim
A lot of investors get caught out not separating private versus rental use in claims for holiday homes. You cannot claim expenses for the time a rental property is used privately. If a holiday home is used privately for six weeks each year, then expenses such as rates can only be claimed proportionally for the 46 weeks the house is available to rent.
- Not declaring all income: The ATO has expanded the data it receives from online rental platforms, along with rental bond authorities and insurers. Investors must declare all income earned, which includes things such as letting and booking fees, bonds and deposits that are kept, insurance payouts and any contributions from tenants.
- Not splitting claims on jointly owned properties: People who jointly own an investment property must split the deductions evenly against both parties’ incomes.
- Property not genuinely available for rent: Expenses associated with running a rental property are not deductable if the property owner doesn’t genuinely intend to earn an income from it. Red flags may go up if you have a negatively geared property that has multiple restrictions on availability such as:
- It is reserved for private use during holiday periods and is unlikely to rent outside of these times.
- References are required for shorts stays and the property doesn’t allow children.
- It is not widely advertised.
- Rental rates are considerably higher than market value.
- Muddling repairs and renovations: Repairs are works considered strictly necessary to keep your home in a tenantable state, for example if a shower screen breaks or carpet is flooded. Renovations to update a kitchen or bathroom are not repairs but capital works and therefore not immediately claimable as an expense, although you may claim depreciation over several years.
- Pre-pay to claim ahead: Property investors can pre-pay expenses up to 12 months in advance to claim an immediate deduction in the current tax year. For example, payment of an insurance premium paid on January 1 that provides cover for the calendar year can be claimed entirely in the financial year ending in June. Owners can generally claim immediate deductions for prepaying:
- Expenses of less than $1,000.
- Expenses of $1,000 or more where the service period is 12 months or less.
- Look for depreciation potential on previous owners’ construction and renovations. Buyers may be able to continue to depreciate capital works on homes built after 1985, or major structural renovations completed by a previous owner. Also, if a previous owner has installed new appliances expressly to sell a property and they have not been used, you may be able to claim depreciation on these. A quantity surveyor and tax specialist can provide more detailed advice.
The range of deductions available will no doubt factor into choosing an investment property. If you’re considering entering the market contact me any time to consider your options.