Australia has one of the most friendly real estate tax laws anywhere in the world. Property owners can take a variety of tax deductions which can often make the difference between positive cashflow and negative gearing.
You may also be eligible to receive a variety of tax benefits if your rental property is rented. Tax deductions are different from one property to the next, so landlords may be confused as to what they can claim.
Your mortgage went through the Australian Taxation Office’s (ATO) official websiteThis will help you determine which expenses can be deducted from the annual tax bill.
How is rental expense classified?
According to the ATO, landlords can only claim deductions on their rental properties during periods when it was tenanted or “genuinely available for rent.” Additionally, property owners can only claim a deduction for the portion of the expense that was used to generate income and they must present records to prove these expenses.
The ATO grouped rental expenses into three categories: rental expenses you can claim now, rental expenses you can claim over several years, and rental expenses you can’t claim. Here’s a rundown of what is included in the first two categories:
Which rental expenses are you eligible to claim right now?
These are the expenses incurred in the day-to-day management and maintenance of your rental property that you can claim against your current year’s income.
1. Advertising costs
Marketing is key to finding the right tenants. This can be done via online channels, print media, or simply by putting up signs in front of your property. Advertising expenses can be deducted from your income.
2. Charges and fees for corporate bodies
If your property is on a strata title – such as apartments and townhouses – you can claim the cost of body corporate fees. However, other charges – including fees paid for the maintenance of common areas – cannot be claimed separately.
3. Council rates
Council rates can only be claimed for periods that your rental property is rented. This means that if your property is rented for less than 180 days per year, then only the rates applicable to that period will be claimed.
4. Land tax
If you own a rental dwelling, you can deduct land tax. Land tax discounts were also provided by the state governments for landlords who offered rent relief to tenants financially affected by the pandemic. Land tax deductions can vary greatly from one state to the next.
Insurance typically covers tenant-related risks – including loss of rental income, and damage to the contents and building. You may be eligible to claim for the cost of insuring your rental home.
6. Interest expenses
The interest costs of an investment property as well as bank fees to service the loan can be claimed on your personal tax return. You cannot claim the interest and principal payments on the entire loan amount if you have used the proceeds to repay a portion of it for personal use. This applies regardless of whether or not you used equity from your rental property to secure the loan.
7. Pre-paid expenses
Services that are beyond your current income year can be claimed as expenses, so long as they cost less $1,000. Only expenses that exceed $1,000 are eligible for tax deduction if they were paid within 12 months.
8. Property agent’s fees and commission
Tax-deductible are fees and commissions paid to agents who collect rent or find tenants.
You can claim deductions for basic utilities – including water, electricity, gas, and internet – for the portion of these expenses that relate to your rental property.
Cleaning up after a tenant moves may be necessary. Cleaning expenses are exempt from tax.
11. Gardening maintenance
You can also claim fees for upkeep and replacement costs of buildings and plants.
12. Pest control
Tax deductions can be claimed for the cost of hiring a professional pest controller. This expense can be claimed by either you or your tenant, depending on who paid.
13. Maintenance and repairs
You can claim repairs in the same income year if these are a direct result of wear and tear – including replacing broken roof tiles after a storm or repairing a broken appliance.
14. Legal costs
You can claim the cost hiring legal professionals if this is related to rental activities – such as evicting a tenant or going to court over unpaid lease. You can also deduct the cost of all legal documentation.
How much can you claim for rental expenses over the course of several years?
According to the ATO, you can claim a deduction over several years for expenses you incur that are related to borrowing, your assets’ decline in value, and capital works.
1. Borrowing money
The expenses you incurred when taking out a loan to purchase your rental property can be claimed. These expenses include lender’s mortgage insurance, LMI, title searches, broker fees, loan documentation costs, stamp duty, and valuation expenses.
Your total borrowing expenses exceeding $100 are subject to a five-year or longer deduction. A full deduction can be claimed if the total cost exceeds $100.
2. Assets that are depreciating
The ATO defines a depreciating asset as “an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.” You can claim this depreciation over several years, usually in line with each asset’s “effective life.” However, you can only claim depreciation on assets that meet certain criteria.
The agency states that landlords can take deductions for brand-new or second-hand assets used in residential rental properties. This is if the property was purchased before 7:30 pm on May 9, 2017, and the asset was installed prior to July 2017. Otherwise, you can only claim depreciation on an asset’s purchase price if the asset was brand-new, or if no one had previously claimed depreciation on the asset because the property was either newly constructed or recently renovated.
3. Capital works
Capital works deductions can be claimed for structural improvements made to your rental property. These can include major renovations or building extensions. Deductions can generally be spread over a 25- or 40-year period.
Total capital works deductions cannot exceed construction costs. Claims cannot be made until construction is completed. For the period your property is rented out or genuinely available to rent, you can also claim deductions.
If your property is completely destroyed, you can claim the income year in that the capital works were damaged. All construction expenses not yet deducted can be claimed. Taxes are not applicable to costs that have been covered by insurance.
It is important to note, however that the information above is general in nature and should not necessarily be taken as professional advice. Your accountant is the best person to consult about your situation before you make any decisions.