As a property investor, there’s plenty to get done to prepare your tax return. Here we look at what records you’re meant to keep and what tax deductions you might be able to claim on your rental properties.
What should you have ready?
Property investors are expected to keep records that confirm their properties are rentals. These might include:
- A statement from the real estate agent showing income and expenses
- Disclosure of any periods when family or friends use your property
- Loan refinance documents, even old ones
- Details of where you advertised for tenants and the enquires received
- Any changes you’ve made to the rental rates.
Income you must declare
Be ready to show the full extent of any rent and rental income you receive. Examples include:
- Insurance payouts – such as for rent loss or damage caused by tenants
- Letting and booking fees
- Amounts retained from booking cancellations
- Deductible reimbursements such as government rebates for solar power.
Expenses you can claim
You can only claim deductions for the period during the year that your property was rented or genuinely available for rent. And you must be able to prove your claim with a receipt or bank statement. Recording your income and expenses as they happen rather than waiting until year-end will save considerable time and hassle at tax time.
Some of these below expenses can be claimed in the same tax year, but others have to be deducted over a more extended period.
- Mortgage borrowing expenses (see box)
- Property agent fees and commission
- Body corporate fees
- Insurance (building, contents and public liability)
- Council rates and water charges
- Repairs and maintenance
- Pest control
- Capital works or improvements (see below)
Go to the Australian Taxation Office (ATO) website for a full list.
Know the difference between repairs and capital improvements
Double check you’re not confusing repairs/maintenance with capital improvements when making claims. The ATO has warned that it’s doubling the number of audits into rental returns as part of a crackdown on incorrect deductions.
Repairs/maintenance generally mean replacing a broken part and doing work to keep the property in a tenantable condition. These costs can be claimed in the year you pay them. By contrast, capital improvements don’t relate directly to wear and tear or other damage due to renting and must be depreciated over several years.
For example, you can claim an immediate deduction for the cost of replacing part of a fence damaged by a fallen tree. But not if you replace the whole fence because it is old. The new fence would be categorised as an improvement, which you can normally claim at 2.5% a year for 40 years from the date construction was completed.
Did you know?
When you first purchase your rental property, you can claim these home loan borrowing expenses as tax deductions, spread over several years:
- loan establishment fees
- title search fees charged by your lender
- costs (including solicitors' fees) for preparing and filing mortgage documents
- mortgage broker fees
- fees for a valuation required for loan approval
- lender's mortgage insurance
Expenses you can’t claim
The ATO is keeping a close eye on incorrect claims, so be sure to avoid common mistakes like claiming for these:
- Expenses paid by someone else, such as electricity bills paid by your tenant
- Stamp duty
- Legal expenses
- GST credits for anything you purchase to lease the premises
- Depreciating assets from an existing residential rental property if you entered into a contract to buy property on or after 7.30pm (AEST) on 9 May 2017.
Go to the ATO website for a full list.
Use an app for recording expenses
If you can’t substantiate it, you can’t claim it. Take a photo of your receipts as you go and use an app – such as ATO’s free app - to help you sort, tag and manage your expenses ready for your tax return.
Your local Yellow Brick Road representative is a great source of information and advice if you need help with sorting out your money, tax planning and property investment.
**The information on this article contains general information and does not take into account your personal objectives, financial situation or needs. If you require further information don’t hesitate to contact the branch directly.