3 Steps to a Headache-Free Rental Property Tax Return
Deductions, records, mountains of paperwork, and the Australian Taxation Office (ATO) watching investment property owners like a hawk. Wouldn’t it be nice if lodging a tax return for a rental property was easy? Well – it doesn’t have to be. While there are a whole suite of considerations to be made when preparing to lodge your rental property tax return, here are three significant factors you can address before making anything official.
Repairs and Capital Improvements
Unfortunately, claiming deductions for repairs to your rental property isn’t one-size-fits-all in nature. Ongoing repairs directly relating to wear and tear as a result of renting out the property can be claimed in full in the same year the expense was incurred, and this includes things like repairing a hot water system, or part of a damaged roof. Note that if you were to replace the entire roof when only part of it was damaged, it is classified by the ATO as an improvement rather than a repair (same goes for renovating a bathroom). These can be claimed at 2.5% each year for 40 years from the date of completion.
If damages existed when the property was purchased, the costs for these cannot be immediately deducted. These could include repairing damaged floor tiles, or replacing broken light fittings. Rather than deducting these, they are instead used to work out your capital gain or loss when you sell the property.
Know what you can claim
Maximising your refund (or minimising your tax bill) relies quite heavily on the deductions you claim. Here are a few that you can claim, as well as some restrictions to keep in mind:
- Borrowing expenses include loan establishment fees, title search fees and costs of preparing and filing mortgage documents. If they are $100 or less, you are entitled to claim the full amount in the same income year you incurred the expense, however if the expenses exceed $100, the deduction is spread over five years.
- Long story short, you cannot claim any deductions for the costs of buying a rental property, including conveyancing fees and stamp duty. Rather, they are used when the property is sold to determine your capital gains tax liability (if any).
- If you’ve taken out a loan to buy your rental property, you can claim the interest as a deduction. Keep in mind, though, that if some of the loan you took out went towards personal use of any sort, you cannot claim the interest for that portion of the loan – only the portion relating to the property.
Claiming the right portion of your expenses
- If your rental property is rented out to family or friends below market rate, you can only claim a deduction for that period up to the amount of rent you received. Also, you are not entitled to any deductions if you use the property yourself for a period of time, as well as if your family or friends stay free of charge.
Keep consistent and thorough records
Now there’s something we’ve all heard before! Unfortunately, despite knowing the importance of keeping good, thorough and accurate records, many business owners struggle to maintain them. Tracking costs, keeping receipts, and maintaining log books are all part of a good records strategy, and with the evolution of apps like Receipt Bank, embracing technology can not only make the process a whole lot easier, but also more accurate. As we all know – the better your records, the less likely it is that you’ll have the ATO knocking on your door.
Most importantly, engaging a tax professional is the best way to ensure that you’ve claimed all the deductions you’re entitled to, and aren’t missing out on anything or indeed overstepping the mark with the ATO.
Written by McKinley Plowman. To speak to one of our tax professionals, contact McKinley Plowman today on 08 9301 2200 or visit www.mckinleyplowman.com.au.