Navigating the dos and don’ts of investment property returns.
Investment in rental properties and holiday homes are once again in the sights of the Australian Tax Office, which has had growing success identifying erroneous claims.
Last year, the ATO audited about 70 percent of returns related to investment properties, which had to be amended most often due to incorrect expenses or earnings claims.
Regulators have ramped up digital data matching from online platforms such as Airbnb to keep a closer eye on the booming sector. But be careful not to short-change yourself either. There are some claim areas investors regularly overlook too.
So, as we run down to the end of the financial year, it’s a good time to brush up on the dos and don’ts of claiming for a rental property.
Money in vs money out
Property investors can claim costs associated with leasing and maintaining an investment property. This includes borrowing expenses and interest, but not principal on loans.
However, investors must declare all income they earn from renting out the property, and they can only claim expenses for the period when it was leased or genuinely available for rent. If you earned more than you spent in any given financial year, your property is positively geared. If you earned less, it is negatively geared, and you can offset your losses against other income streams.
What can you claim and when?
You can claim most ongoing expenses in the year you incur them, including:
- Mortgage interest.
- Council rates and water charges.
- Cleaning, gardening and pest control.
- Insurance.
- Body corporate fees.
- Advertising and property agent charges (including photography for rental listings).
- Banking and bookkeeping fees for accounts used for rent and upkeep payments.
- Repairs and maintenance including appliances to keep the property in a tenantable condition, such as replacing a damaged fence.
- Security costs (new keys cut).
- Depreciating assets under $300.
You can only claim some major, or one-off, expenses over several years, and they include:
- Depreciation on construction costs (if a home is post-1985), or depreciation on more recent major structural improvements.
- A specialist quantity surveyor can help with this.
- Borrowing costs of more than $100 (such as loan establishment fees, lenders mortgage insurance, search fees, solicitor and mortgage broker fees).
- Depreciating assets over $300 such as new (but not second-hand) fridges, washing machines, dryers and carpeting.
Initial repairs. If you buy a property that has defects or damage, addressing this is classed as capital work, and you must deduct it over several years. This is unlike repairs due to wear and tear from ongoing rental, which you can claim in the year the expense is incurred.
What you can’t claim
Not separating private and rental use in claims for holiday homes catches a lot of investors out. You cannot claim expenses for the time you use a rental property privately. If you use a holiday home privately for six weeks each year, then you can only claim expenses, like rates, proportionally for the 46 weeks it is available to rent.
Common mistakes
- Not declaring all income: The ATO has expanded the data it receives from online rental platforms, along with rental bond authorities and insurers. Investors must declare all income they earn, including things such as letting and booking fees, bonds and deposits they keep, insurance payouts, and any contributions from tenants.
- Not splitting claims on jointly owned properties: People who jointly own an investment property must split the deductions evenly against both parties’ incomes.
- Property not genuinely available for rent: Expenses associated with running a rental property are not deductable if the property owner doesn’t genuinely intend to earn an income from it. Red flags may go up if you have a negatively geared property that has multiple restrictions on availability such as:
- They reserve it for private use during holiday periods and are unlikely to rent it outside of these times.
- They require references for short stays, and they don’t allow children on the property.
- They do not widely advertise it.
- Rental rates are considerably higher than market value.
- Consider repair work strictly necessary to keep your home in a tenantable state, for example, if a shower screen breaks or carpet floods. Renovations to update a kitchen or bathroom are not repairs but capital works and therefore not immediately claimable as an expense, although you may claim depreciation over several years.
Top tips
- Pre-pay to claim ahead: Property investors can pre-pay expenses up to 12 months in advance to claim an immediate deduction in the current tax year. For example, payment of an insurance premium paid on January 1 that provides cover for the calendar year can claim entirely in the financial year ending in June. Owners can generally claim immediate deductions for prepaying:
- Expenses of less than $1,000.
- Expenses of $1,000 or more where the service period is 12 months or less.
- Look for depreciation potential on previous owners’ construction and renovations. Buyers may be able to continue to depreciate capital works on homes built after 1985, or major structural renovations completed by a previous owner. If a previous owners install new appliances solely to sell the property and they haven’t used, you can claim depreciation on them. A quantity surveyor and tax specialist can provide more detailed advice.
The range of deductions available will no doubt factor into choosing an investment property. If you’re considering entering the market contact me any time to consider your options.
Article Source: https://newstepfinance.smartonline.com.au/pitfalls-and-hidden-gems/