What Expenses Can Investors Claim on their Rental Property?

There’s no question that buying an investment property can help you build wealth and secure your financial future.

After all, Australian property prices have historically risen in value over the long-term, despite the occasional fall. So, if you buy the right property at the right price, there’s a good chance you can profit from capital gains if you ever decide to sell.

What’s more, you can earn a passive income by renting out the property. This doesn’t just boost your cashflow, it can also help you maximise your return come tax time. That’s because, depending on your situation, you might be able to offset many of your investment property expenses against your rental income, including interest on your investment loan.

But be warned. The Australian Taxation Office recently announced property investors are on its radar this tax season. As a result, it will be scrutinising investors’ returns very closely, paying particular attention to rental income declarations and deductions.

Understanding what you can claim on your rental property and keeping good records can help you stay on the right side of the ATO. With this in mind, which expenses are tax-deductible … and which aren’t?

Your property needs to be ‘genuinely’ available

Firstly, it’s important to note that you can only claim deductions for times when your property is rented or ‘genuinely’ available for rent. Additionally, you can only claim a deduction for the portion of the expense that was used to generate the income, and must keep records to prove these expenses.

As an example, let’s say you own a rental property at the beach. At times, you might want to stay in it yourself, or let your friends and family use it for mates’ rates. In that case, you won’t be able to claim deductions for the proportion of expenses that relate to your private use. And when you rent out the property at below-market rates, your deductions for that period will have to reflect the lower rental rate.

As another example, imagine that when you do look for a full-fee tenant, your advertising is limited to posting about the property in restricted social media groups or telling people at your workplace. In that case, the property might not be considered ‘genuinely’ available, as you would be deliberately limiting its exposure to potential tenants.

What other expenses can’t you claim?

You can’t claim the following expenses on an investment property:

• Any expenses relating to your personal use of the property
• Any expenses not actually paid by you, such as water or electricity bills paid by your tenants
• Buying or selling costs, such as conveyancing fees and stamp duty (except in the ACT)
• A deduction for the decline in value of second-hand depreciating assets

Additionally, while you can claim the interest you pay on your home loan (read more below), you cannot claim the following borrowing costs for your rental property:

• The original principal amount you borrowed
• Principal repayments against the loan balance
• Life insurance premiums, where your home loan will be paid out in the event you die, become disabled or lose your job
• Private borrowing expenses, such as if you use a portion of the loan to buy a car

What rental expenses can you claim now?

The ATO groups rental expenses into three categories:

1. Rental expenses you claim now
2. Rental expenses you claim over several years
3. Rental expenses you can’t claim (see above)

You can typically claim an immediate deduction against your current year’s income for all expenses that are related to the day-to-day management and maintenance of the property.

Eligible expenses include:

• Advertising for tenants
• Body corporate fees and charges
• Council rates
• Utilities
• Land tax
• Cleaning
• Gardening
• Pest control
• Home insurance and landlord insurance
• Interest expenses on your loan
• Prepaid expenses
• Property agent’s fees and commission
• Repairs and maintenance
• Legal expenses.

What rental expenses can you claim over several years?

You can generally claim a deduction over several years for three types of expenses. These are:

1. Borrowing expenses
2. Depreciation (i.e. the decline in value of assets within the property)
3. Capital works

With borrowing expenses, you can claim any expenses you incur in taking out your investment loan, such as:

• Loan establishment fees
• Lender’s mortgage insurance
• Title search fees
• Mortgage documentation costs

If these expenses total more than $100, the deduction is spread over five years or the term of the loan (whichever is shorter). If your overall costs are $100 or less, you can claim a full deduction in the income year they incurred.

What about wear and tear?

Depreciation allows you to claim for the wear and tear of your assets over time. 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 if they meet certain criteria.

Please note that this is general advice only. Speak to a tax professional to see what sort of tax deductions would apply to your personal situation.

Thinking about buying an investment property? Shore Financial can help. To discuss your home loan options and model different financial scenarios, call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.