Rental Properties

Things you should know when owning a rental property  

 Record Keeping

If you invest in a rental property you will need to keep records from the time you purchased the property until the time that you sell the property.    Any gain you make when selling or disposing of the property may be subject to capital gains tax.   

Deduction claims for acquisition and disposal of rental property

You cannot claim a deduction in your annual tax return from your rental income for the cost of acquiring or disposing of your rental property.  Expenses that cannot be claimed include the purchase cost of the property, conveyance costs, advertising expenses for selling the property and stamp duty on the transfer of the property.  However these costs will form part of the cost base (expenses that can be deducted from the gain that is made from selling the property) of the property for capital gains tax purposes when selling the property.

Interest claims

The yearly interest paid on the loan used to purchase the property is deductible, provided that all the money borrowed was used to purchase the property.  If you take out a loan to purchase a rental property, you can claim a deduction on the interest charged on that loan each year. However the property must be rented or available for rent in the income year for which you are claiming a deduction. 

Borrowing expenses incurred in taking out a loan for the property

If the total borrowing expenses incurred in taking out a loan for the property are more than $100, the deduction is to be spread over a five years period or the term of the loan, whichever is less.  If the total deductible borrowing expenses are $100 or less they are fully deductible in the income year they are incurred. 

 Co-ownership of rental property

The way that rental income and expenses are divided between co-owners varies depending on whether the co-owners are joint tenants or tenants in common or there is a partnership carrying on a rental property business.

Co-owners who are not carrying on a rental property business must divide the income and expenses for the rental property in line with their legal interest in the property. 

·         If they own the property as joint tenants, they each hold an equal interest in the property.

·         If they own the property as tenants in common, they may hold unequal interest in the property. Eg. One may hold a 20% interest and the other an 80% interest.

This means that for income tax purposes rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners stating otherwise. 

Example:  Joint tenants 

Mr and Mrs Joint own an investment rental property as joint tenants.  Mr and Mrs Joint agreed that Mrs Joint should claim 80% of the rental income or loss and Mr Joint should claim 20% of the rental income or loss on their income tax returns for the year because during the year Mrs Joint paid most of the expenses for the rental property.  As Mr and Mrs Joint hold the property as joint tenants the rental income or loss must be share in line with their legal interest in the property which is 50% each.  Mr and Mrs Joint must each include half of the total income and half of the total expenses in each of their tax returns.

Example:  Tenants in common 

If Mr and Mrs Joint owned their property as tenants in common in equal shares they would still claim 50% each of the total property deduction.

If Mr and Mrs In Common own an investment rental property as tenants in common and Mrs In Common’s legal interest was 75% and Mr In Common’s legal interest was 25% they would each include their actual legal interest percentage of income and expenses on their tax return. 

 Repairs prior to renting out the property

When you do some repairs to a newly acquired rental property prior to the tenants moving in (repainting walls and repairing doors etc), the expenses are capital in nature because they are incurred to make the property suitable for the initial rental and are not claimable  as a deductable expense against your rental income in your income tax return. 

 Improvements to the property

Improvements made to the property are not claimable as repairs and are not deductible as an expense because they are capital in nature. Improvements would include landscaping and adding another room.

 Rental Income and deductions

Rental income is the income received by the owners of a rental property in the same proportion as the ownership interest shown on the title and must be declared in the year it is received. You are able to claim the costs involved in renting out the property as deductions for the period your property is rented or is available for rent each financial year.  You can claim management costs, the cost of maintenance and repairs and the interest on the loan to purchase the rental property in the current financial year.  Some borrowing expenses, depreciation and capital works are claimable over a number of years.

Deductions for travel expenses are now disallowed

The Government announced that from 1 July 2017 all travel deduction relating to inspecting, maintaining or collecting of rent for a rental property will be disallowed as a tax deduction.