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Tax Mistakes

Top 10 Tips to Help Rental Property Owners

It’s essential that you avoid making these common tax-related errors.

#1 – Ensure your Property is Genuinely Available to Rent

Your property has to be genuinely available as a rental unit in order for you to claim all the related expenses you are entitled to. This means that you will have to have shown a clear intention to rent the property out, and this should have been done by advertising it. The rental price should also be aligned with that of other similar properties in the area.

#2 – Keep Accurate Records

You will need to have some form of evidence of all of the income and expenses so that you can claim everything you are permitted to claim for. If you sell a rental property, you may be liable to pay capital gains tax, and it is recommended to keep records during the time you own the property and for five years from the date of selling it.

#3 – Dealing with Capital Improvements and Initial Repairs

It is not permitted to claim initial improvements or repairs as an immediate deduction in the same income year that the expense was incurred.

  • Repairs must directly relate to wear and tear or other forms of damage that occurred as a result of the property being rented. Repairs for damage that was present when the property was bought, like replacing a damaged light fitting or repairing flooring are not immediately deductible. Those costs will be used to calculate profit when the property is sold.
  • Ongoing repairs relating directly to wear and tear or damage that occurred due to the property being rented such as repairing a roof or replacing a hot water system are classified as repairs and can be claimed in full in the same income year the expense was incurred.
  • Replacing an entire roof when only a portion is damaged is deemed as an improvement and is not immediately deductible.
  • If you completely replace a damaged item that is detachable from the property and it costs over $300, the cost has to be depreciated over a number of years.

#4 – Claiming Borrowing Expenses

If borrowing expenses exceed $100, the deduction must be spread over 5 years. If less than $100, the full amount can be can be claimed in the same year the expense was incurred. Borrowing expenses can include title search fees, establishment fees and costs associated with compiling and filing mortgage documentation.

#5 – Claiming Purchase Expenses

No deductions can be claimed for costs associated with purchasing your property. This includes stamp duty (for properties outside the ACT) and conveyance fees. If you sell your property, these costs will be used when calculating whether capital gains tax must be paid.

#6 – Claiming Loan Interest

Interest can be claimed as a deduction if you obtain a loan for your rental property. If some of the loan proceeds are allocated for personal use like going on holiday, interest for that part of the loan cannot be claimed.

#7 – Accurately Determining Construction Costs

Certain building expenses like alterations and structural improvements can be claimed as capital works deductions. Capital works deductions can be claimed at 2.5% of the construction cost for 40 years from the date construction was completed.

If the previous owner claimed a capital works deduction, they will need to provide you with the information used to determine costs. If they didn’t use the property to produce assessable income, an estimate can be obtained from a qualified professional.

#8 – Claiming the Correct Portion of Expenses

if your rental unit is occupied by family or friends who are paying below market rate, you will only be allowed to claim a deduction for that time up to the amount of rent received. Deductions cannot be claimed when friends or family stay free of charge.

#9 – Co-owning a Property

if you own a rental unit with someone else, rental income and expenses must be claimed according to your legal ownership thereof.

#10 – Getting Capital Gains Right When Selling

When selling your rental unit, you’ll either make a capital gain or capital loss. This is the difference between what it cost to buy and improve the unit, and what you get when selling. If you make a capital gain, it must be included in your tax return that financial year. If you make a capital loss, the loss can be carried over and deducted from capital gains in future years.