To assist property investors there are many great deductions that you can take advantage of that will make your investment property far more affordable. However, often the claims that should make sense in the real world are not considered acceptable by the ATO. This can make claiming the correct tax deductions complicated for many property investors.
You should always talk to your accountant to ensure that you make the most out of potential claims. But, to get you on the correct path here are a few common problem areas.
Can I make claims on times my property was empty?
Generally, you can only claim deductions incurred during the period where you rented the property or while the property was genuinely available for rent. So, there must be tenants in the property, or you need to be actively looking for tenants. This means that if you left your property vacant in order to complete renovations, you may not be able to claim the expenses if it was not rented or available for rent during this time. While there are some exceptions to this rule, there usually needs to be a relationship between the money you make and the deductions you claim.
Interest on bank loans
The actual loan repayments for investment property loans and bank charges are not deductible. Instead the interest on those repayments is deductible. If the loan facility is also used for multiple purposes, then only part of the interest expenses will be deductible. That means that if funds are drawn out of a loan, originally given for renovations for your investment property, for a holiday, then only a portion of the interest repayments are deductible.
Repairs or maintenance
There is often major confusion surrounding the differences between repair, maintenance and capital works. But this is an area the ATO scrutinises heavily, so it is important that you understand the rules before making any claims. One difference is that repairs and maintenance can be claimed immediately while the deduction for capital works is spread over several years.
Repairs generally refer to wear and tear that result from the property being rented out. This could refer to a broken or worn out part, like fixing a broken toilet or fence palings.
A capital works improvement refers to changes such as the replacement of an entire asset, for example a new oven, fence, or hot water system, or improvements or extensions where you go beyond what is required to restore the property to its former state.
Repairs and maintenance undertaken to fix problems that existed when the property was purchased are not deductible.
The sharing economy
You can claim similar deductions for ‘sharing’ a room or entire house as you would a rental property. These deductions can be claimed on expenses such as interest on the home loan, cleaning fees, council rates, insurance, fees charged by the facilitator, and more. However, these deductions do need to be in proportion to the amount of time you rent the home out. If you rent your home for two months of the financial year then you can only claim up to 1/6th of your expenses. For those who only rent out a portion of their homes these claims would then need to be appropriately reduced further.
For more information on the sharing economy and your tax obligations check out this article here.
Friends, family and holiday homes
If your rental property is in a known holiday location, you may find that the ATO is closely watching all that you are claiming. You can only claim deductions on expenses for your holiday home if it was rented or genuinely available for rent. It also cannot have really been used for private purposes at the time.
So, if your friends and family are using the property for free or at a reduced rent then it is unlikely that the property was genuinely available for rent, and so, this may reduce the deductions you can claim.
Your property is more likely to be considered unavailable if you have not advertised it widely, it is located somewhere unappealing, is difficult to access, and the rental conditions, such as price, no children clause, etc, have made the property unappealing and uncompetitive.
To make the most out of your rental property, whether you are renting for long term tenants or are participating in the sharing economy, you should always talk to your accountant. This way you can safely avoid scrutiny by the ATO, while still making the most of the deductions available to you.
If you need an accountant talk to Link Advisors today.