Did you know that a random audit by the ATO last year revealed nine out of ten rental property owners made a mistake with their rental deductions? In this first of a two-part series, we share some tips on what you can and can’t claim. This article assumes you own a 100% rental property with no private use.
Buying an investment property carries a host of upfront expenses, but not all of these are deductible straight away. Stamp duty is not deductible, and neither are conveyancing or legal fees for the purchase. Instead, these expenses will be included in the asset’s “cost base” for capital gains tax (CGT) purposes when you later sell the property. On the other hand, ongoing land tax (and other charges like council and water rates) are deductible.
Another trap that can arise is initial repairs. If you need to remedy damage that already existed when you bought the property, the repair costs are not immediately deductible in the year you incur them. Instead, these can be claimed gradually over time as capital works deductions.
You also can’t deduct costs associated with selling the property, like advertising and conveyancing expenses (which instead form part of the CGT cost base). You can, however, claim advertising costs for finding tenants while you own the property.
Repairs or improvements?
While initial repairs aren’t immediately deductible, ongoing repairs and maintenance costs for damage and wear that arises while the property is leased (or available for lease) are deductible in the year you incur them. This includes costs not only to remedy direct damage or deterioration, but also for preventative maintenance to keep the property tenantable, such as oiling a deck. Gardening, lawn-mowing, cleaning and pest control are also deductible.
It’s vital to distinguish between a repair and an improvement. This is because unlike ongoing repairs, improvement costs are not immediately deductible. The ATO says that if the work doesn’t relate directly to wear and tear (or other damage) from leasing the property, it’s not a repair.
Some improvement costs are claimed over time as capital works deductions (where they are structural improvements) and in other cases as capital allowances (where they involve a depreciating asset such as carpets, timber flooring and curtains).
With the ATO promising to double the number of audits of rental property claims this year, it’s important to get good advice. Contact us for expert assistance to ensure you maximise your deductions while staying within the rules.