The tax deductions you can, and can’t, claim for your rental property

The tax deductions you can, and can’t, claim for your rental property

The tax deductions you can, and can’t, claim for your rental property

Everyone dreads tax time, but if you own a rental property then it’s actually one of the most advantageous times of the year. It’s when you can actually start putting all the money you’ve put into your property to work.

Some property owners end up missing out on crucial savings because they haven’t put in the effort to keep their documents or receipts, or they just don’t bother.

That’s a big mistake!

Rental property owners have access to a huge number of deductions, savings and potential cost benefits at tax time – but you need to make sure you know what you’re doing. That means:

  • Have all your documents and receipts in order
  • Make sure you speak with an accountant or tax professional
  • Understand what you CAN or CANNOT claim

That last point is a big one. The ATO will crack down hard if they detect you’re claiming costs way outside the norm, and if you don’t have any documents to back yourself up? Well, you’ll end up owing quite a bit of cash…which will blow out any potential tax savings on your property.

Why are deductions important?

The more deductions you can claim for your rental property, the bigger “cost base” you’ll have. That cost base is taken into account when you sell the property, which means you’ll end up having to pay less capital gains tax.

What can I claim?

Generally, you can claim any cost that’s involved in a few different areas:

  • Repairing your property
  • Managing your property
  • Maintaining your property
  • Improving your property

The ATO treats every one of these separately and with its own rules about when you can actually deduct the cost you pay.

There’s also a catch: to claim anything you need to make sure that your property is either rented out, or is advertised for rent. It doesn’t count if you just intend to rent it out in the future (although there is one exception…which we’ll talk about a little further down.)

1.Repairing your property

The ATO defines repairs as “work to make good or remedy defects in, damage to, or deterioration of the property”.

So, for example – that might be fixing up a fence that was destroyed in a storm, or fixing appliances like a hot water heater. It certainly includes things like fixing a broken window.

For tax purposes, repairs generally mean restoring something to the order it was before it was damaged or made inoperable.

The good news is that you can claim an “immediate” deduction for any of these costs, which means you deduct it from your tax the year you actually made the expense.

2. Maintaining your property

Again, the ATO has its own little rule for maintenance: “work to prevent deterioration or fix existing deterioration”.

Things that would fall under a maintenance category would be activities like painting, cleaning, or maintenance on infrastructure like your plumbing or electrical connections. You could also deduct things like putting a finish on a deck.

Cleaning and gardening services definitely come under this category.

Again, you can claim these types of costs in the same year you pay them out.

3. Managing your property

This is the big one – because it’s going to be where you spend a lot of your money.

When it comes to the day-to-day stuff, you can generally claim a tax deduction. So that would include things like:

  • Agents’ fees and commissions (including for a site like Cubbi)
  • Advertising for tenants
  • Body corporate fees and charges
  • Council rates
  • Water charges
  • Land tax
  • Travel taken to inspect the property (this is changing soon…be sure to read below!)

Remember though, that “management” refers to what you do when you actually own the property. You can’t claim a deduction for say, agents’ fees when you actually buy or sell the property.

4. Improvements

This one’s a little different from the others.

There’s a difference between repairing something, and actually improving your home – at least according to the ATO.

You can still definitely claim them. But instead of an “immediate” deduction, which you claim the year you spend the money, you have to claim improvements over several years.

What’s an improvement, exactly?

The ATO says an improvement is anything that will increase the amount of rent you charge, increase the life of the property, or anything that goes beyond just fixing or repairing something.

Think about those examples we used in the earlier sections:

  • Replacing a broken hot water heater would be a repair. But installing a new solar system instead of your broken gas system would be an improvement.
  • Fixing a broken window? That’s a repair. Installing new sills and different types of windows – like with glazing for weather protection – would be an improvement.
  • Fixing damaged paint is a part of maintaining your property. But say when painting you want to install some new kitchen cabinets. That’s an improvement.
  • Generally any type of renovation is an “improvement”. That includes if you buy a property and do it up before getting tenants in.

Remember, you can still claim the money you spend on improvements – including renovations. You just need to do it differently.

The ATO has a fancy word for improvements: capital works deductions. It just means you have to claim them at a special rate of 2.5% a year on a depreciation schedule, for 40 years after the construction in question is completed

You can read more about that type of deduction at the ATO here.

Interest

Interest for rental properties is one of the better deductions you can claim. According to the ATO, you can claim any interest on a loan you used to purchase a rental property.

You can even claim the interest on that loan if you used the loan to buy an appliance like an air conditioner, make repairs, finance renovations, or even purchase the land before building.

Remember earlier, when I said you can only claim deductions if your property is rented out? Well, this is the exception I was talking about.

Say you take out a loan to finance some renovations for a rental property, before you have any tenants in it. Well, you can claim the interest on that loan even though you didn’t have any tenants in the building. Pretty cool.

Legal expenses

If you have any legal expenses from…

  • evicting a non-paying tenant
  • expenses incurred in taking court action for loss of rental income
  • defending a damages claim in respect of injuries suffered by a third party on your rental property.

…you can claim those too.

Get a depreciation schedule!

A depreciation schedule is just a record of the assets in the property, along with details about how much you can claim as they depreciate each year. They usually include things like building and construction costs, along with costs of capital improvements, etc, and they’re a great way to determine how much you can claim every year.

If you don’t have one, you can get one from a builder, architect or even a quantity surveyor. You’re better off paying an experienced professional for a detailed depreciation schedule to save you money in the long run.
We’re fans of these guys, if you’re looking for someone.

…and what can’t you claim?

Beware, there are a few things the ATO doesn’t let you claim. These include:

  • Any type of personal use for your rental property. That includes if you’re living in it, or using it for any other purpose than renting it out. Sometimes this trips people up with regard to holiday homes.
  • Utility bills paid by the tenant, or any other expense related to the property that isn’t actually paid by you (like water consumption).
  • Expenses to inspect a property before you actually buy it (like pest and building inspections)
  • Expenses for self-education on investment, like attending seminars to buy a rental property
  • Acquisition and disposal costs for buying or selling a property. That includes costs like advertising, conveyancing, and stamp duty on the transfer

Getting ready for next year’s tax return

Although you’ll just be preparing your 2016-17 tax return, you should know there a couple of changes that will affect your returns next year when it comes to deductions.

You can read more about these changes in the post we made a little while back.

Next steps!

Where to from here?

This seems like a lot of work, but it’s definitely worth it. The more documents you keep, the more you can claim, and the more you can claim the more you can save on tax when you eventually sell your property.

Here are some things you should be doing:

  1. Keep every single record. Every single receipt, every single document – keep them either in a file cabinet or electronically. If you’re a Cubbi user you can even add your expenses in the dashboard and print off a report at the end of the year.
  2. See an accountant. Don’t do this stuff on your own. Speak with an accountant to make sure you’re getting all the deductions you can, because they’ll definitely know about special deductions and savings that you won’t. Be sure to speak with someone who specialises in rental properties.
  3. Get a depreciation schedule! Like we mentioned before – these are invaluable and will list out everything you can claim over time. Really, really make it a priority to get one of these so you can claim as much as possible.

I reckon one of the better costs in there is the management fees. This includes the cost of using a platform like Cubbi to manage your property, which you can deduct in the same year you spend the money.

You’ll be saving money both because you’ll pay less than an agent, and then you still get to claim the expenditure. It’s a win-win.

We even provide an EOFY statement that you can simply download from the Cubbi dashboard and give to your accountant – you just need to enter your expenses in. Cubbi automatically adds the rent payments.

If you’re interested, the ATO puts out a massive booklet for everything you need on rental property deductions. Download the free booklet here.

About Michael Gilbert

Co-founder & Joint CEO of Cubbi. Common Ground.

I started real estate in 2006 on the NSW Central Coast. Loved it but noticed too many owners and tenants were unhappy with the value most agents were giving or simply wanted another option that didn't involve doing it all themselves. That's how Cubbi came about.