It’s that time of year again, where you can, hopefully, get a little bit of coin back from the tax man and use it to invest further or clear some troublesome expenses. But you want to make sure July is a time of many happy returns, rather than paying more than you budgeted for.
Remember, landlords can claim all kinds of expenses on tax, including interest paid on investment loans, property management fees, landlord insurance and more.
However, the ATO gets more advanced every year with its scrutiny and it’s important to make sure you get your claims right and avoid costly mistakes.
So, we did some research to find out the most common rental property tax mistakes and how to avoid them.
Off the record
It’s surprising how many investors don’t keep the right records of their income and expenses as proof, if needed by the ATO. Each financial year you should request an income and expense statement from your property manager, so you can claim what you are entitled to. All records must be kept for the duration of your ownership of the property and, if you decide to sell it, for another 5 years afterwards.
A point of interest
While you can claim the interest on your investment property loan, you can’t claim any part of it that you may use for personal use. So if part of your loan was used for a holiday or to buy something, that portion of interest cannot be deducted. It used to be able to, but not anymore. When claiming interest, make sure you get a statement from your bank to figure out how much you have paid throughout the financial year.
Borrowing and buying expenses
Borrowing expenses such as loan establishment fees, title search fees and admin costs around preparing mortgage documents can be claimed in the same year as the purchase if less than $100. But if more, the deduction is spread over five years.
When it comes to buying expenses however, the purchase price of the investment property cannot be claimed as a deduction. And nor can associated costs, such as stamp duty, conveyancing fees and even buyer’s agent fees.
Many of the associated costs form part of the overall capital gains tax (CGT) assessment if
you decide to sell the property, but they can’t be claimed directly as yearly tax deductions.
Repairs and improvements
Repairs undertaken because of the property being rented out can be claimed in the year the expenses were incurred. So, a hot water system needing fixing, or a leaking roof being patched up can be claimed. Initial repairs, which are those needed upon purchase in order to get the property up to scratch for renting out, can be claimed over a number of years as a capital works deduction.
Meanwhile, improvements, such as an extension, or a bathroom renovation can be deducted as building costs at 2.5% a year for 40 years. These cannot be directly claimed as a deduction. The costs of completely replacing (rather than repairing) something detachable from the house (like a hot water system), also need to be depreciated over a number of years if the total cost is more than $300.
Beware family discounts
You might rent your property out to family or friends and, if you do so, you’re probably doing them a favour by charging them below market rate. If you charge them less, or let someone stay for free for a while, you can’t claim full deductions for that period. So if a mate stays for a month without paying rent, you can only claim 11/12th of the year’s deductions.
Get the right accountant
Property investing is not a one size fits all endeavor, with different rules for different scenarios, so it’s important to get a good accountant to help prepare your return. And not just any accountant. You need someone with a good knowledge of property investing. And the good news is that the accountants’ fees are claimable as deductions in the following financial year.