The Australian Taxation Office (ATO) has provided its top tips to assist rental property owners in avoiding the most common tax errors made by landlords. Regardless of whether you lodge your tax return yourself or use a tax agent, the ATO says following these tips to avoid common mistakes will save you on both time and money.
Tip 1. Correctly split income and expenses for jointly owned properties
If you co-own a rental property, you are required to declare your rental income and claim your expenses according to your respective legal ownership of the property. If you are tenants in common there may be different ownership percentages between each owner and your tax claims should align with your individual ownership percentage.
Tip 2. Ensure there is a clear intention to rent the property
In order to claim a tax deduction, the property must be genuinely available for rent if there are no tenants in it. This means there is a clear intention to rent the property and it is advertised so that someone is likely to rent it. The rent should be set in accordance with similar properties in the area and property owners are required to avoid setting what may be considered unreasonable rental conditions.
Tip 3. Claim the correct repairs and capital improvements
There are guidelines around whether an expense can be claimed in the same year as the cost is incurred. It depends on what the costs are in relation to. To clarify:
- Ongoing repairs related to wear and tear or other damage that has occurred due to renting out the property can be be claimed in the same year you incurred the expense.
- Initial repairs for damage that existed when the property was purchased are not immediately deductible. These costs are to be used to work out your capital gain or loss when selling the property.
- Replacing an entire structure when only part of it is damaged, or renovating, is classified as an improvement and is not immediately deductible. These are considered building costs which can be claimed at 2.5% each year for 40 years from the date of completion.
- If you completely replace a damaged item that is detachable from the house and it costs in excess of $300 the cost must be depreciated over multiple years.
Tip 4. Claim borrowing expenses
Loan establishment fees, title search fees or costs involved in preparing and filing mortgage documents are all considered borrowing expenses. If these fees exceed $100 the deduction is spread over five years, whereas if they are $100 or less, you can claim the full amount in the same year you incurred the expense.
Tip 5. Don’t claim purchasing costs
The ATO considers conveyancing fees and stamp duty as purchasing costs which cannot be claimed as a tax deduction by rental property owners. If you sell your property, these costs are then used to work out if you are required to pay capital gains tax.
Tip 6. Claim interest on your loan
You are able to claim interest as a deduction if you take out a loan for a rental property. However, you can only claim the part of the interest that relates to the rental property and not interest on part of the loan that is used for other purposes such as personal use.
Tip 7. Claim construction costs (correctly)
You are able to claim certain building costs such as extensions, alterations and structural improvements as capital work deductions at 2.5% of the costs for 40 years from the date of completion. Where your property was previously owned by someone else who claimed capital works deductions, you should ask them to provide you with the details to ensure you can correctly calculate the deduction you are entitled to claim.
Tip 8. Keep the right records
To ensure you can claim everything you are entitled to, you must have accurate records of your income and expenses. Capital gains tax may apply once you sell your property so it is recommended that you keep records over the period you own the property and for five years from the date you sell the property.
If you would like further information on these tips or assistance in submitting your rental property tax deductions, please give us a call on 03 5443 0344.