Creative accountancy will only get you so far. So when it comes to understanding what expenses you can claim as deductions, good record keeping is key.
According to figures from independent property advisory Matusik Property Insights, there are around nine million dwellings in Australia, eight million of which are held by investors. Of these, Matusik claims 73% hold one investment property, 17% hold two, 6% hold three and just 4% hold four or more.
To help ensure the one in five of us who own investment properties properly understand the tax implications of owning a property that is used as a revenue stream, the Australian Tax Office publishes a guide solely to explain to investors how to treat rental income and expenses.
The Rental Properties 2019 Guide notes that there are three categories of rental expenses,
- those for which you cannot claim deductions;
- those which you can claim an immediate deduction in the income year you incur the expense; and
- those that have deductions you can claim over a number of income years.
Effective 1 July, 2019 the expenses for which you may be entitled to an immediate deduction in the income year you incur the expense include advertising for tenants, bank charges, body corporate fees and charges, cleaning, council rates, electricity and gas, gardening and lawn mowing, interest on loans, pest control, property agent’s fees and commissions and water charges, among others.
The guide notes that expenditure for repairs you make to the property may be deductible. However, generally the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.
The ATO states there are three types of expenses you may incur for your rental property that may be claimed over a number of income years, including borrowing expenses, amounts for decline in value of depreciating assets (allowed only in certain circumstances), and capital works deductions.
Types of expenses that cannot be claimed
Generally speaking, the types of expenses for which you cannot claim deductions for include: acquisition and disposal costs of the 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 was not genuinely available for rent, or travel expenses to inspect a property before you buy it.
It’s also important to remember that any capital gain you make when selling or otherwise disposing of the property will be subject to capital gains tax (CGT) except in some circumstances where you rent out the home you’ve been living in.
If your property is located outside Australia, special rules apply to the deductibility of your rental property expenses. In this instance, it’s best to contact the ATO or your specialist tax advisor for advice.