Top 10 tips for rental property owners to avoid common tax mistakes

Below is a list of tips from the Australian Taxation Office (ATO) that should help rental property owners avoid what it has found are the 10 most common tax errors made by rental property investors. The ATO says that avoiding these tax mistakes will save many taxpayers both time and money. 

1. Claiming the right portion of expenses

  • You can’t claim deductions for rental property expenses when family or friends stay free of charge, or for periods when you use the property for your own purposes. 
  • If the property is rented out below market rate, you can only claim a deduction for that period up to the amount of rent received.

2. Initial repairs and capital improvements

  • Initial repair costs for damage that existed when you bought the property are not immediately deductible. These costs come into play later when working out profit upon the sale of the property (i.e. your capital gain or loss: see tip 9 below).
  • Ongoing repairs that relate to wear and tear, or other damage that resulted from renting out the property can be claimed in full in the same income year.
  • Replacing an entire part of the property, such as replacing a bathroom, is classified as an improvement. These “building costs” can be claimed at 2.5% each year for 40 years after completion.The cost of replacing damaged items that are detachable from the house, more than $300, (e.g. hot water system) needs to be depreciated over a number of years.

3. Construction costs

  • Certain building costs, including extensions, alterations and structural improvements, can be claimed as capital works deductions.
  • If the previous property owner claimed a capital works deduction, they should give the current owner the relevant information to calculate costs, so it always pays to ask for this. 

4. Claiming borrowing expenses

  • Borrowing expenses include loan establishment fees, title search fees and costs of preparing and filing mortgage documents. If borrowing expenses are more than $100, the deduction is spread over five years. If they are $100 or less, you can claim the full amount in the same income year as the expense was incurred. 

5. Purchase costs

  • You can’t claim deductions for the costs of buying your property e.g. conveyancing fees and stamp duty. These costs are used when you sell the property to work out your capital gain (or loss): see tip 9.

6. Make sure the property is genuinely available for rent

  • The property must be genuinely available for rent in order to claim a tax deduction. This means you must be able to show a clear intention to rent the property.  

7. Claiming interest on your loan

  • You can claim interest as a deduction if you take out a loan for your rental property. However, if you use some of the loan money for personal use, such as buying a boat or going on a holiday, you are not permitted to claim the interest on that part of the loan. 

8. Co-owning a property

  • If you own a rental property with someone else, you must declare rental income and claim expenses according to your legal ownership of the property. 

9. Capital gains when selling

  • When you sell your rental property, you will make either a capital gain or a capital loss (that is, the difference between what it cost to buy and improve the property, and what you receive when you sell it). 
  • If you make a capital gain, you need to include this in your assessable income for that financial year. If you make a capital loss, you can carry the loss forward and deduct it from capital gains in later years.

10. Keeping the right records

  • Having evidence of your income and expenses is vitally important to be able to claim everything you are entitled to, so you should keep records over the whole period you own the property and for five years from the date you sell it.

*Content in partnership with Tax & Super Australia