The excitement of owing an investment property has faded. You are now heading to a new journey to be a landlord and deal with disclosure of rental income and expenses for the taxation obligations.
As a tax practitioner for the past 15 years, I have always been asked the following questions.
My husband and I jointly own a rental property, but the mortgage is under his name only. My husband earns higher income and he is paying mortgages all the time. Can he claim all the rental loss?
No. The rental income and expenses are to be declared in the same proportion as the ownership interest shown on the title, regardless who pays the mortgage and if the mortgage is structured solely under one person’s name.
I rent my investment property to my parents. I feel sorry to charge them the same rents that I would charge to the public. Can I declare what rents that I’ve charged and what expenses that I’ve paid for the property?
No. The rents charged to a related party, i.e. family or friends, must be at market rate to be able to claim the rental expenses in full. If your rents are below the market rent, you can only claim deductions up to the amounts of the rents charged.
I have a holiday home down the coast and only rent out occasionally, can I claim all the rental expenses?
No. If you rent out your holiday home and also use it for private purposes, you must proportion the expenses based on the period rented or genuinely available for renting. You cannot advertise in the ways that limit its exposure to potential tenants or place unreasonable conditions to prevent the property being rented out.
If I do not rent out my holiday home, do I still need to pay capital gain tax?
Yes. If you do not rent out your holiday home, you do not need to disclose rental income in your tax return until you sell it. However, when you sell the property, you will need to calculate the capital gains or losses on the property. You will need to keep a record for the costs associated with holding the property, such as mortgage interest, rate, and maintenance costs, to work out the capital gain tax.
I refinance my home and use the equity in my home for the deposit of an investment property. Can I claim tax deduction on the refinance?
Yes. Interest paid on the loan is tax deductible, but only limit to the portion of the loan used for purchasing the investment property. It is also advisable to set up a separate loan facility for that portion so you can trace interest deductions without needing to go through all the transactions and try to proportion the mix use of the loan.
I recently bought an old investment property. I need to do some renovations to be able to rent it out. Can I claim tax deductions on the money spent on the renovation costs?
No. Initial repairs on a newly purchased property are not tax deductible and will form part of cost base of the property. Repairs made to the property during the period it is rented or available for rent are deductible.
My tenant has been complaining about the old kitchen and I am thinking to renovate it. Can I claim immediate tax deduction on the renovation costs?
No. The improvements to the property are not fully deductable. Some items, such as stove and cook top, need to be depreciated over the effective life of the assets at a higher rate. Other items, such as tiling and down lights can only be claimed at a rate of 2.5% over 40 years.
I had a dispute with my tenant and incurred some legal fees to recover the default rent. Can I claim tax deduction?
Yes. Legal fee incurred for depending the rental income is tax deductible. However, legal fee incurred on purchasing the property or selling the property is not deductible, which is a capital expenditure and will form part of cost base of the property.
I paid mortgage insurance and some other refinance costs. Can I claim tax deduction on those?
Yes, If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year they are incurred. For the borrowing expense is over $100, it is not deductible upfront. They are deductible either the period of the loan or five year, whichever is shorter. If you repay the loan early and is less than five years, you can claim a deduction for the balance of borrowing expenses in the year the loan is fully repaid.
Can I deduct travelling expense for maintenance or inspections of my investment property?
It depends. For travel before 1 July 2017, you can claim your travel expenses in relation to rental property, including a residential property. After 1 July 2017, travel deductions are no longer available. However, you may still claim your travel expenses,
- if the property is a commercial property, or
- if you are in the business of letting rental properties, or
- if the property is not hold under individuals, but in a structure, such as in a company.
What are other rental expenses that I can claim other than the ones mentioned above?
Other common rental expenses you can claim are:
- Advertising for tenants.
- Bank fees
- Body corporation fee or strata levies.
- Council rates.
- Insurance
- Land tax
- Legal fees for lease, etc.
- Maintenance and repairs
- Property agent fees
- Water rates
We recommend you to seek professional advice when purchasing an investment property. We are happy to recommend property strategist Rene Marzinger from Mirren Property Investment on (02) 8814 5275. For some great property investment ideas, please check their blogs at https://www.mirren.com.au/blog/
If you would like to know more about how we can maximise your tax deduction legally, please contact Beyond Taxation today on 1300 552 993 or email Joy@beyondtaxation.com.au