Can I claim rental property expenses as tax deduction? The answer is YES. You can claim a deduction for certain expenses you incur for the period your property is rented or is genuinely available for rent.
The rental income received is taxable to the owners of the property in the same proportion as the ownership interest as shown on the title. However, rental property can also take advantage of available tax deductions to maximise tax refund.
In this article we will cover following rental-property tax deduction questions:
- Eligibility Criteria to claim deduction for rental property?
- List of rental property expenses for which you can claim an immediate deduction?
- List of rental property expenses for which you can claim over a number of years?
- List of rental property expenses for which you cannot claim deduction?
- What is Negative gearing?
- What is Capital gain tax?
1. Eligibility Criteria to claim deduction for rental property?
Rental property owner can claim a tax deduction for a wide range of the expenses related to your rental property including interest on the loan. These expenses can only be claimed if the property is rented or available for rent.
2. List of rental property expenses for which you can claim an immediate deduction?
Following expenses can normally be claimed on tax:
- advertising for tenants
- bank charges
- body corporate fees and charges*
- building depreciation
- council rates
- depreciation of fittings and fixtures like stoves, carpets and hot water heaters
- electricity and gas
- gardening and lawn mowing
- in-house audio and video service charges
- insurance for building, contents and public liability
- interest on loans
- land tax
- lease document expenses for preparation, registration and stamp duty*
- legal expenses (excluding acquisition costs and borrowing costs)
- mortgage discharge expenses*
- pest control
- property agents fees and commissions
- quantity surveyor's fees
- repairs and maintenance
- secretarial and bookkeeping fees
- security patrol fees
- servicing costs, for example, servicing a water heater
- stationery and postage
- telephone calls and rental
- tax-related expenses
- travel expenses include the costs of travel to inspect, maintain or collect rent for the property (not applicable to residential rental properties)
- water charges
3. List of rental property expenses for which you can claim 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:
- boorrowing expenses such as (1). loan establishment fees, (2). title search fees charged by your lender, (3). costs for preparing and filing mortgage documents, (4). mortgage broker fees. (5). stamp duty charged on the mortgage, (6). fees for a valuation required for loan approval, (7). lender’s mortgage insurance billed to the borrower,
amounts for decline in value of depreciating assets (allowed only in certain circumstances), refer to depreciation schedule
- capital works deductions, refer to depreciation schedule
4. List of rental property expenses for which you cannot claim deduction?
Expenses for which you are not able to claim deductions include:
- acquisition and disposal costs of the property. However, these may form part of the cost base of the property for CGT purpose. (1). purchase cost of the property, (2). fees on bank guarantees in lieu of deposits, (3). conveyancing costs, (4). advertising expenses to find the property (5). fees of a buyer’s agent you engage to find you a suitable rental property to purchase, (6). stamp duty on the transfer of the property (but not stamp duty on a lease of property)
expenses not actually incurred by you, such as water or electricity usage charges borne by your tenants
expenses associated with periods where your property (including your holiday home) was not genuinely available for rent
expenses that are not related to the rental of a property such as: 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
travel expenses to inspect a property before you 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 (including a business of letting rental properties), or an excluded entity.
5. What is Negative gearing?
'Negative gearing' refers to the situation where the costs of owning your rental property exceed the rental income. The difference, which represents a loss, can normally be offset against your other income like salary and wages.
So, say your income is $70,000 a year but your property expenses are $20,000 a year, you will only need to pay income tax on $50,000.
The main advantage of negative gearing is that it makes a rental property much more affordable as the tax savings can be substantial. This way you'll pay less tax. Note, capital expenses like the repayment of your loan principal or renovations that add value cannot be claimed as an ongoing tax deduction.
Similarly, if the rent outweighs the costs of owning the property, it is said to be 'positively geared' and you can expect to pay tax on the profit the property generates each year.
6. What is Capital gains tax?
If you make a profit on the sale of you property this means you have made a 'capital gain'. This gain is taxable - the profit is added to your regular income in the year you made the sale, and the tax will be determined accordingly. However there are important capital gains tax concessions available to property investors.
Firstly, the cost base used to calculate the capital gain includes the price you paid for the property plus buying and selling costs like stamp duty, legal fees and agent's selling commission. This helps to reduce the profit for tax purposes.
In addition, if you have held onto the property for over 12 months you are entitled to claim a 50% discount on the capital gain at tax time. For example, if you made a profit of $50,000 on the sale of the place but you have owned it for over one year, you will only pay tax on a profit of $25,000.