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

Posted 20 Jun

1. Getting initial repairs and capital improvements right

  • Initial Repairs: For damages present when you bought the property (e.g., broken window, damaged floorboards), any repairs done before the property becomes income-producing will be considered capital costs and non-claimable. These costs are added to the cost base of the property and affect your capital gain or loss calculation when you sell. If you wish to claim these costs, consider delaying the works after the property is tenanted.
  • Improvements: For major upgrades (e.g., new roof, bathroom renovation), you can claim 2.5% of the cost each year for 40 years.
  • Expensive Detached Items: For items over $300 not attached to the house (e.g., hot water system), claim the cost over several years as a decline in value deduction.


2. Interest on your loan

You can claim interest on a loan for your rental property, but only for the part used for the rental. If you use some for personal expenses, like a boat or holiday, you can't claim that interest. Separate the interest between rental and personal use for the entire loan period.


3. Borrowing expenses

If your borrowing expenses are over $100, you spread the deduction over 5 years. If they're $100 or less, you can claim the full amount in the same year you incurred the expense.

What’s typically included in borrowing expenses:

  • Include loan establishment fees, title search fees, and costs for preparing and filing mortgage documents.         
  • Don't include stamp duty on the property title.

In the first year, only claim borrowing expenses for the number of days you own the property.

4. Purchase costs

You can't claim deductions for costs of buying your property, like conveyancing fees and stamp duty. If you sell the property, these costs help determine your capital gains tax.

5. Construction costs

  • You can claim deductions for building costs like extensions, alterations, and structural improvements. Usually, you can claim 2.5% of the construction cost each year for 40 years from when it was completed.
  • If you’re doing a structural renovation like replacing a kitchen, it may be worth engaging a Quantity Surveyor to value the old kitchen and claim the deduction before demolishing it.
  • If someone else owned the property before you and claimed these deductions, ask them for the details. If you can't get this information, hire a professional who can estimate the construction costs, often by visiting the property.


6. Body corporate fees and charges

Payments to your body corporate administration fund are fully deductible in the year you pay them.

For major improvements or repairs funded by the body corporate, you can't claim an immediate deduction. Instead, you may claim a capital works deduction once the work is completed and the cost is allocated to the appropriate fund.

7. Apportioning expenses and income for co-owned properties

  • Declare rental income and claim expenses based on your legal ownership share.
  • If you're joint tenants, you both own an equal share.
  • If you're tenants in common, ownership shares can vary.

8. Apportioning deductions for private use of your property

  • Deduct expenses only for periods directly linked to earning rental income.
  • If you rent out part of the property or for part of the year, divide expenses based on the rented area and duration.
  • Your personal use of the property includes renting to family or friends below market rates or keeping it vacant.
  • To deduct expenses for vacant periods, you must demonstrate intent to rent:
    • Advertise the property at a competitive rent rate.
    • Avoid setting unreasonable rental conditions.

9. Keeping the right records

  • Keep records of your rental income and expenses as evidence.

When selling your rental property:

  • Capital gains tax may apply, so keep records for the entire period you own the property and for 5 years after you sell it.


10. Selling
your rental property

When you sell your rental property, you might have a capital gain or loss. This is typically the difference between:

  • What you spent to buy, maintain, and improve the property (known as the cost base).
  • What you receive from selling it.

Do not include amounts already deducted from rental income, such as depreciation and building improvements, in your cost base. Also, reduce your cost base by any deductions claimed for building improvements made after 7:30 pm on 13 May 1997.

If you have a capital gain, you must include it in your tax return for that year.

If you have a capital loss, you can carry it forward and deduct it from future capital gains.


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