Rental Property Expenses - A Tax Saving Bonanza for Property Investors
Rental property expenses, now that you have employed the services of a Quantity surveyor you have an exact, complete and valued list that can be used in your tax return.
This enables your property wise accountant to claim the known maximum dollar value allowed against your investment which in many cases easily pays for the Quantity survey report fee in the very first year.
So rental property expenses, what are they?
You can claim a deduction for certain expenses you incur for the period your property is rented or is available for rent.
However, you cannot claim expenses of a capital or private nature. There may be situations where you need to apportion between deductible and non-deductible expenses.
If the property is not available for rent for the full year, you may need to apportion some of the expenses on a time basis.
If only part of the property is used to earn rent, you can claim only that part of the expenses that relates to the rental income. As a general guide, apportionment should be made on a floor area basis—that is, by reference to the floor area of that part of the residence solely occupied by the tenant, together with a reasonable figure for tenant access to the general living areas, including garage and outdoor areas.
If you combine travel to inspect or maintain your rental property with travel for private purposes, you may need to
apportion your travel expenses.
Acquisition and disposal costs:
You cannot claim a deduction for the costs of acquiring or disposing of your rental property. Examples of expenses of
this kind include the purchase cost of the property, conveyancing costs, advertising expenses and stamp duty on the
transfer of the property (but not stamp duty on a lease of property).
However, if you acquired the property after 19 September 1985, these costs may form part of the cost base of the property for capital gains tax purposes.
Rental property expenses that can be claimed if incurred in relation to your rental property include:
advertising for tenants
body corporate fees
electricity and gas
gardening and lawn mowing
in-house audio/video service charges
– public liability
interest on loans
property agent’s fees and commission
quantity surveyor’s fees
repairs and maintenance
secretarial and bookkeeping fees
security patrol fees
servicing costs—such as servicing a water heater
stationery and postage
telephone calls and rental
travel and car expenses:
– rent collection
– inspection of property
– maintenance of property
Let’s examine some of these rental property expenses (deductions) in further detail.
Tax-related expenses, accountancy fees:
I have already suggested the use of an accountant who is familiar with the claims of property investment. This should be
at the top of your “important” list. To ensure a maximum benefit, all allowable rental property expenses (deductions) must be claimed.
Remember sloppy paper work and accountancy costs you dollars. Many investors don’t claim their allowable deductions because either they or their accountant are unfamiliar with exactly what is allowed or have not employeed the services of a specialist Quantity Surveyor to maximise your claim. That is unprofessional, to say the least.
Keep records, do your homework and make sure your accountant does theirs. Need an accountant that is tax wize about property?
Bank Charges and borrowing expenses:
These are expenses directly incurred in taking out a loan for the property. They include loan establishment fees, title search fees, costs for preparing and filing mortgage documents, stamp duty charged on registration of a mortgage, and valuation fees if the lender required a valuation to be obtained as a condition of them lending you the money.
The notable exception is the stamp duty on property when bought which is deductible against Capital Gains Tax upon sale of the property. One exception to that is in the A.C.T where this is deductible in the year of purchase.
Interest expenses are not borrowing expenses. If the total cost of these items is over $100, the deduction is spread over 5 years or the term of the loan, whichever is less. If the total cost is $100 or less, it is fully deductible in the first year.
If you repay the loan early and in less than 5 years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment. If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year that you had the loan.
Interest on loans:
If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the
interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction. If you take out a loan to purchase land on which to build a rental property, the interest on the loan will be deductible from the time you took it out. However, if your intention changes and the property is not used to produce rent or other income, you cannot claim the interest after your intention changes.
You may also claim interest charged on loans taken out:
To purchase depreciating assets, or
For renovations, or
For repairs to the property required due to you using it to produce rental income.
Banks and other lending institutions offer a range of financial products which can be used to acquire a rental property.
Many of these products permit flexible repayment and redraw facilities. As a consequence, a loan might be obtained to purchase both a rental property and a private car. In cases of this type, the interest on the loan must be divided into deductible and non-deductible parts according to the amounts borrowed for the rental property and for private purposes.
If you have a loan account that has a fluctuating balance due to deposits and withdrawals for both private and for rental property purposes, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan. You must separate the interest that relates to the rental property from any interest that relates to the private use of the funds. An example of this type of arrangement is a line of credit where your salary is paid into the mortgage account.
It is simpler for your accounts to have a private account that is offset against the balance of the rental account. An automatic transfer can be made to meet the loan repayments.
If you restructure your rental property borrowing arrangements and you incur a charge for a penalty interest payment; this is a bank charge for interest that would otherwise have accrued on those borrowings.
You may be able to claim a deduction for the amount of the charge. Such a situation could arise when you renegotiate a loan agreement that has a fixed interest rate to provide for a variable interest rate and you are required to pay an amount, which the lender would otherwise have charged under the terms of the original loan.
If a loan is taken out to purchase a rental property and you start to use the property for private purposes, you cannot claim any interest expenses you incur after that time.
Some rental property owners borrow money to buy a new home and then rent out their previous home. If there is an outstanding loan on the old home and the property is used to produce income, the interest outstanding on the loan, or part of the interest, will be deductible.
However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income.
This follows whether or not the loan for the new home is secured against the former home.
Structured correctly, all investment accounts should be separate from all other non-deductible debt for ease of accountancy and accuracy at tax time.
Body corporate fees:
This is a fee that applies to Strata Titled properties and is sometimes called a Strata Levy. It is usually paid quarterly
and includes costs of building insurance, maintenance and any upkeep of buildings and grounds. You may be able to claim a deduction for body corporate fees and charges you incur for your rental property.
Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or they may be applied to a special purpose sinking fund.
If the fees and charges you incur include a contribution to a special purpose sinking fund, you will only be able to claim a
deduction for that portion of the fees and charges that relate to the cost of day-to-day administration and maintenance.
This is because payments to a special purpose sinking fund are usually to cover the cost of capital improvements or major repairs and are therefore not deductible. See Taxation Ruling TR 97/23—Income tax: deductions for repairs. (Available at any tax office)
You may be able to claim a capital works deduction for the cost of capital improvements or capital repairs once the cost has been charged to the sinking fund.
If the body corporate fees and charges you incur are for things like the maintenance of gardens, incidental repairs and building insurance, you cannot also claim deductions for these as part of other expenses. For example, you cannot claim a separate deduction for garden maintenance if that expense is already included in body corporate fees and charges.
For buildings; not covered by a body corporate.
Other insurances include:
Default in payment of rent
Prevention of access
Death of Tenant
Un-tenantable due to damage
Legal fees and others peculiar to some properties provided the property is used for producing an income.
While there appears to be no end to the insurance cover that you can take out, it is wise to work through the different options with an industry professional.
Insurance is one of the must haves of property investment; it is not an area to be penny wise and pound foolish!
Some legal expenses incurred in producing your rental income are deductible—such as the cost of evicting a non-paying tenant. Most legal expenses, however, are of a capital nature and are therefore not deductible.
These include costs of:
Purchasing or selling your property
Resisting land resumption
Defending your title to the property.
However, non-deductible legal expenses may form part of the cost base of your property for capital gains tax purposes.
These fees average about 7% of the rent collected. More than this I think is just downright greedy and you should find another property manager!
This is especially the case when rents reach the upper third of the market. Quality tenants don’t require much managing.
The paperwork load for the manager is the same no matter what the rent and one can confidently predict the higher the rent the greater the management profit margin!
Book keeping fees:
Any costs incurred in keeping records of property expenses. This includes property rental statements and sundry fees covering things like postage. Some agents charge up to $5-$6 a month for property rental statements. Although these fees are claimable, anything above $5 is starting to be a bit rich.
Watch out for exorbitant fees of some managing agents. Remember, it is your business, so trim costs where you can, just like any other business.
This can be quite lucrative in a non-working partner relationship and especially so with a portfolio of properties with a substantial rent roll. Allocating this legitimate work to your partner enables this expense to be your partner’s income.
This could amount to substantial dollars of tax-free income to them while creating tax effectiveness to you as a couple.
All rates and charges, including council, water, sewage and garbage collection, are deductible.
Travelling expenses incurred in collecting rent, inspecting or maintaining your investment property. Where travel related to your rental property is combined with a holiday or other private activities, you may need to apportion the expenses. If you travel to inspect your rental property and combine this with a holiday, you need to take into account the reasons for your trip.
If the main purpose of your trip is to have a holiday and the inspection of the property is incidental to that main purpose, you cannot claim a deduction for the cost of the travel.
However, you may be able to claim local expenses directly related to the property inspection and a proportion of accommodation expenses.
Repairs and maintenance:
One thing that confuses many people is that, from a tax perspective, your property should be safe, secure and presentable when available for let. Expenditure for repairs you make to the property after letting may be deductible.
However, the repairs must relate directly to wear and tear or other damage that occurred as a result of renting out the property.
A repair is classified as returning something to its original serviceable condition. There is a discretionary time before repairs are no longer classed “improvement costs”.
Repairs generally involve a replacement or renewal of a worn out or broken part. For example: If you buy an old rental property and some time into the tenancy something fell into a state of disrepair, then it would be classed as a “repair cost”.
This could be replacing some guttering damaged in a storm or part of a fence that was damaged by a fallen tree branch. An improvement is more than maintenance and improves your original property. Therefore, any improvement costs are added to your cost base and are not considered as a repair cost.
Building improvement costs are addressed when you sell the property and it is then reduced from your capital gains tax assessment.
However, the following expenditures are capital and are not deductible expenses:
Replacement of an entire structure or unit of property (such as a complete fence or building)Improvements, renovations, extensions and alterations Initial repairs—for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.
Capital expenses are added to your Capital Works (special building write off) deductions.
This includes investment seminars, books, home computer and software for accounting and investments analysis.
Generally, if a legitimate expense was incurred in the running and management of your investment property, it may be considered as a deductible expense. Hence, the need to keep receipts and have your tax return prepared by a property-wise accountant.
This refers to your own place of residence and is so often missed as a legitimate claim. If you use office space at home
in the management of your properties then this is an expense incurred in the running of your properties and, hence, claimable.
How much and what do you claim? Work out how much of your home that you use for office purposes as a percentage and claim that percentage from the running costs of your home. Generally, this could amount to about 20 to 25% of space used. This applies to the cost of running the management of your properties, not to the cost of buying your home.
In other words, you are using part of the home you are buying for business purposes, so only expenses directly related to the running of that business are claimable.
Be aware, however, a caution to consider is that by claiming this expense you will be liable to Capital Gains Tax on that
proportion of your home if you sell your home. Further information on this is provided under Taxation ruling TR 93/30.
You will see an example of a completed worksheet in my book. A reminder that the figures used have been included as an illustration only.
How do you make an application for a depreciation schedual?
You need to first contact a Quantity Surveyor who will then require certain particular details about your investment
property. Fees for a standard residential property Quantity Surveyors report including site inspection and bound book
copy ranges from $599 to $799. This tax deductable fee should bequoted to you on contact and will represent the work
required to complete the report for your property.
A Quantity Surveyor will need to know things like
Name the report is to be made in:
Your accountants name:
Your accountants address:
Your accountants number:
Contact for access to the property (Your property manager)
Address of your Property investment
For a property that you purchased, when construction was completed
Land value at purchase
(From rates notice)
Approx Age of building
For a property that you had a builder construct
Construction cost of house
Construction completion date
Have you installed any fixtures or fittings since purchase and if so when?
Have you ever lived in your investment property?
And a sundry of other information.
Return from rental property expenses (this page) to pay less tax
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