What can I claim on my rental property in my tax return?
Renting out a property that you own can be a fantastic way to boost your tax refund.
In fact, when your rental property expenses exceed your rental property income (negative gearing); the loss that results can actually be deducted from your taxable income, often resulting in a significant tax refund (depending on your mortgage interest).
The most common rental property tax deductions are as follows:
Interest Repayments
Interest payments on your rental property’s mortgage are deductible, separate from other loan-related charges.
Insurance
Both landlord insurance and building/contents insurance premiums are tax deductible.
Advertising Fees
Expenses related to advertising and marketing for tenant recruitment can be claimed.
Repairs and Maintenance*
Costs incurred for property repairs and maintenance are eligible for deductions. (Refer the section below for further detail).
Body Corporate Fees / Strata
Costs associated with body corporate fees can be claimed, excluding maintenance expenses for shared spaces.
Property Management Fees
Fees for professional property management services are fully deductible.
Cleaning Expenses
Costs for regular property cleaning or purchasing cleaning products can be claimed.
Council Rates
Local government and council rates are fully deductible during the property’s rental availability.
Gardening and Lawn Mowing
Expenses related to garden and lawn maintenance under the lease agreement can be deducted.
Water Charges
Charges directly incurred for water service are deductible.
Pest Control
Costs for pest control can be claimed if it’s the property owner’s responsibility.
Utilities
Utilities provided under the lease, such as electricity and internet, are tax deductible.
Legal Fees
Only legal fees linked to rental activities are deductible, not those considered capital costs (i.e. the cost of the rental property itself).
Tax Depreciation Schedule and Accounting Fees
Accountant fees and tax depreciation schedule expenses are deductible in the same year of payment.
Refinancing Costs
Administrative costs tied to mortgage refinancing can be claimed.
Land Tax
Land tax payments above the threshold for investment properties are deductible.
Property Depreciation
Property depreciation includes capital works deductions for the property structure and plant and equipment depreciation for removable assets.
Travel
Eligibility for claiming travel expenses to and from the rental property depends on your rental property business status. You cannot claim a deduction for travel expenses that relate
to your residential rental property unless you are: using the property in carrying on a business (including a business of letting rental properties), or an excluded entity.
The Distinction Between Repairs, Maintenance, and Improvements in Property Investment
To determine claimable expenses, it’s vital to grasp the definitions of repairs, maintenance, and improvements for your property investment.
Repairs:
Repairs involve addressing defects or damage in your rental property caused by wear and tear or direct rental use. Examples include fixing storm-damaged roof tiles, repairing broken appliances, or resealing a leaking bathtub.
Repairs can be claim in the year that they are incurred HOWEVER you can’t claim costs for repairing pre-existing damage upon property purchase as repairs and maintenance. These are considered initial repairs, treated as improvements for tax purposes.
Maintenance:
Maintenance encompasses preventive work to prevent property deterioration or fix existing damage. This includes tasks like pest control, painting, cleaning, and gardening.
Maintenance can be claim in the year that it is incurred.
Improvements:
Improvements enhance property value or income generation, such as expanding rooms, adding a pool, or remodelling.
Unlike repairs and maintenance, improvements raise property standards and these are not instantly claimable. Instead, you can benefit from their tax depreciation over time.
Improvement costs fall under capital expenses, affecting your property’s cost base for capital gains tax. Maximising your cost base helps lower potential capital gains tax upon property sale.
Key information required to prepare your tax return
- A summary of your rental income and various expenses (if you use a property agent, you’ll be able to obtain a rental agent statement summarising most of these aspects).
- Your mortgage interest (if you only rented out your property for part of the year, these expenses must be apportioned to the period of time in which your property was being advertised for rent or had tenants).
- Depreciation report. A rental property depreciation report outlines the decreasing value of assets in the property over time. It includes asset details, initial cost, estimated lifespan, depreciation methods, annual depreciation amount, and accumulated depreciation. It’s prepared by a specialist like a quantity surveyor, helps claim tax deductions, and should be updated according to tax regulations.
- Details of any other expenses not summarised on your agent statement which could include strata, council rates, water rates along with misc. repairs & maintenance.
In conclusion, understanding the array of allowable deductions for your rental property can significantly impact your tax return. By taking advantage of the various deductible expenses, from interest payments and insurance premiums to repairs, maintenance, and management fees, you can maximise your tax refund.
Remember the critical distinctions between repairs, maintenance, and improvements to ensure accurate claims!!!
Furthermore, staying organised by gathering key information such as rental income details, mortgage interest, depreciation reports, and other relevant expenses will streamline the tax return preparation process. Ultimately, leveraging these deductions can enhance your financial position and optimise the benefits of owning a rental property within our taxation framework.
