What tax deductions can you claim on your rental property?

Article by Mark Rosanes for Your Mortgage

Australia implements one of the friendliest real estate tax laws in the world, providing property owners with a range of tax deductions that can sometimes spell the difference between negative gearing and positive cash flow.

And if you own a rental property, you may be eligible for a myriad of tax benefits that can boost your capital. However, tax deductions vary from property to property, which can sometimes leave landlords confused about what they can claim.

‘Your Mortgage’ website went through the Australian Taxation Office’s (ATO) official website to help you identify what expenses can be deducted from your annual tax bills.

How are rental expenses classified?

According to the ATO, landlords can only claim deductions on their rental properties during periods when it was tenanted or “genuinely available for rent.” Additionally, property owners can only claim a deduction for the portion of the expense that was used to generate income and they must present records to prove these expenses.

The ATO grouped rental expenses into three categories: rental expenses you can claim now, rental expenses you can claim over several years, and rental expenses you can’t claim. Here’s a rundown of what is included in the first two categories:

What rental expenses can you claim now?

These are the expenses incurred in the day-to-day management and maintenance of your rental property that you can claim against your current year’s income.

1. Advertising costs

Good marketing allows you to find the best tenants. You can do this through online channels or print media, or even by simply putting up a sign in front of your property. Any expenses you incur from advertising can be claimed against your income.

2. Body corporate fees and charges

If your property is on a strata title – such as apartments and townhouses – you can claim the cost of body corporate fees. However, other charges – including fees paid for the maintenance of common areas – cannot be claimed separately. 

3. Council rates

You can only claim council rates during periods when your rental property is tenanted. This means if your property was rented for only 180 days during the year, then you can only claim the rates for that period.

4. Land tax

You can use land tax as a deduction if you have a rented dwelling on your investment property. State governments have also offered land tax discounts to landlords who provided rent relief to their tenants financially impacted by the pandemic. It is important to note that land tax deductions differ greatly between states and territories.

5. Insurance

Insurance typically covers tenant-related risks – including loss of rental income, and damage to the contents and building. You can claim the cost of insuring your rental property.

6. Interest expenses

You can claim the interest costs for an investment property and any bank fees for servicing that loan on your personal tax return. However, you cannot claim repayments on the principal sum or interest on the entire size of the loan if you have refinanced a part of the loan for private purposes. This is regardless of whether you used the equity in your rental property as security in that loan.

7. Pre-paid expenses

You can claim expenses for services that extend beyond the current income year, provided they cost less than $1,000. Expenses that cost $1,000 or more are tax-deductible only if the service period is 12 months or less.

8. Property agent’s fees and commission

Fees and commission paid to agents who collect rent, find tenants, and manage and maintain your rental property are tax-deductible.

9. Utilities

You can claim deductions for basic utilities – including water, electricity, gas, and internet – for the portion of these expenses that relate to your rental property.

10. Cleaning

Your property might need cleaning after a tenant moves out. Cleaning costs are tax-deductible.

11. Gardening maintenance

You can also claim fees paid for the upkeep and replacement of plants and structures.

12. Pest control

The cost of hiring a professional pest controller is tax-deductible. You or your tenant can claim this expense, depending on who paid for the service.

13. Repairs and maintenance

You can claim repairs in the same income year if these are a direct result of wear and tear – including replacing broken roof tiles after a storm or repairing a broken appliance.

14. Legal expenses

You can claim the cost of hiring legal professionals if this is related to rental activities – such as evicting a tenant or going to court over an unpaid lease. The cost of preparing all relevant legal documents is also tax-deductible.

What are the rental expenses that you can claim over several years?

According to the ATO, you can claim a deduction over several years for expenses you incur that are related to borrowing, your assets’ decline in value, and capital works.

1. Borrowing expenses

You can claim expenses incurred in taking out the loan you used in buying your rental property. These include loan establishment fees, lender's mortgage insurance or LMI, title search fees, mortgage documentation costs, broker fees, valuation expenses required for loan approval, and stamp duty.

If your total borrowing expenses exceed $100, the deduction is spread over five years or the term of the loan, whichever is shorter. If the overall costs are $100 or less, you can claim a full deduction in the income year these were incurred.

2. Depreciating assets

The ATO defines a depreciating asset as “an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.” You can claim this depreciation over several years, usually in line with each asset’s “effective life.” However, you can only claim depreciation on assets that meet certain criteria.

According to the agency, landlords can claim deductions on both brand-new and second-hand depreciating assets in residential rental properties if the property was bought before 7:30 pm on 9 May 2017 and the asset was installed before 1 July 2017. Otherwise, you can only claim depreciation on an asset’s purchase price if the asset was brand-new, or if no one had previously claimed depreciation on the asset because the property was either newly constructed or recently renovated.

3. Capital works

You can claim capital works deductions for the costs of structural improvements done on your rental property. These include major renovations and building extensions. Deductions are generally be spread over a period of 25 or 40 years.

However, total capital works deductions cannot exceed the construction costs, and claims cannot be made until the construction has been completed. Deductions can also be claimed for the period that your property is rented or genuinely available for rent.

If your property is destroyed resulting in a total loss of the asset, you can deduct an amount in the income year in which the capital works were damaged. You can also claim all construction expenses that have not yet been deducted. Any costs covered by insurance, however, are not tax-deductible.

You must take note, however, that the information provided above is of a general nature and should not be treated as professional advice. It is still best to discuss your circumstances with your accountant before taking any action.

Skybridge Capital is an MFAA accredited finance broker with expertise in commercial finance committed to the highest industry standards. Contact us for more information now!