Recently the ATO increased focus on rental property deductions. You can claim expenses relating to your rental property but allowable deductions cannot be claimed in relation to a rental property unless the property is held for rental (genuinely available for rent) or actually rented to tenants. Furthermore, co-owners must divide the income and expenses of the property in line with their legal interest in the property. For example, a husband and wife who jointly own an investment property cannot make an agreement to split the income and deduction unequally to get a tax advantage for the highest income earner.
All rental expenses can be divided into three categories:
- Non-deductible expenses;
- Expenses for which you can claim an immediate deduction in the income year you incur them;
- Expenses deductible over a number of income years.
Expenses for which you are not able to claim deductions include acquisition and disposal costs of the property; expenses not actually incurred by you; borrowing expenses or interest on the portion of the loan you use for private purpose like buying a new car.
Example of expenses for which you may be entitled to an immediate deduction include advertising for tenants, cleaning, insurance, interest on loans, property agents fees and commissions, council rates, land taxes and strata levies.
Borrowing expenses, amounts for decline in value of depreciating assets and capital works deductions may be claimed over a number of income years.
There are a number of strategies that you can use to maximise your investment property deductions. For example, to prepay certain rental property expenses or renovate after the property ceases to be an investment property but before year end. If your rental property was built after 1985, obtaining a depreciation schedule is another very effective strategy to maximise rental property tax deductions.
If you are considering buying or have already purchased an investment property contact one of our Tax Accountants on (02) 9223 9166 or submit an online enquiry to discuss how to maximise your rental property deductions.