Rental property and tax

Owning a rental property in Australia comes with significant tax implications, both in terms of income generated and expenses incurred. It's crucial for landlords to understand their obligations and potential deductions to manage their tax effectively.

Here's a breakdown of key aspects:

1. Rental Income and Taxable Income:

• What to declare: All income received from your rental property, including rent payments, retained bond money (if kept due to tenant default or damage), insurance pay-outs for lost rent or damage, and tenant reimbursements for expenses, must be declared. Even income from short-term rentals or renting part of your home through sharing platforms is assessable.

  
  

• How it's taxed: Rental income is added to your other assessable income (like salary, wages, business income, etc.) and taxed at your individual marginal tax rate. This means the more income you earn, the higher the tax rate applied to your rental profits.

  
  

• Co-ownership: If you co-own a property, rental income and expenses must be attributed based on your legal interest in the property.

  
  

2. Rental Property Tax Deductions:

The good news for landlords is that many expenses incurred in earning rental income are tax-deductible, reducing your overall taxable income. These deductions can be claimed immediately or over several years.

Common Deductible Expenses (Immediate Deductions):

• Interest on loans: This is often the largest deduction. You can claim interest on loans used to purchase, renovate, or repair the rental property. However, if part of the loan is used for private purposes, only the portion related to the rental property is deductible.

  
  

• Property management fees: Fees paid to real estate agents or property managers for services like finding tenants, collecting rent, and managing maintenance.

  
  

• Council rates and water charges: Rates and charges paid by the landlord.

  
  

• Land tax: If applicable in your state or territory.

• Body corporate fees/strata levies: For properties in strata complexes, covering maintenance and management of common areas.

  
  

• Repairs and maintenance: Costs to fix damage or wear and tear, restoring an item to its original condition (e.g., fixing a leaking roof, plumbing repairs, painting). Note: This differs from "improvements."

  
  

• Insurance premiums: Building insurance, contents insurance (for furnished rentals), and landlord insurance.

  
  

• Advertising costs: Expenses incurred to find new tenants.

  
  

• Pest control: Costs for professional pest control services.

  
  

• Gardening and lawn maintenance: For properties with gardens.

  
  

• Legal expenses: Directly related to the rental property (e.g., lease agreements, tenant disputes, evictions).

• Administrative expenses: Stationery, phone calls, internet usage for property management tasks.

  
  

• Borrowing expenses: Loan application fees, mortgage registration fees, lender's mortgage insurance (LMI) can be deducted over five years or the loan term.

  
  

Deductions Over Several Years (Capital Expenses/Depreciation):

• Capital Works Deductions: This allows you to claim the cost of building construction, structural improvements, or major renovations over time (typically 40 years at 2.5% per year). Examples include building a new room, adding a garage, or making structural alterations. Improvements made by previous owners can also be claimed.

  
  

• Depreciation on Plant and Equipment: You can claim the decline in value of eligible assets within the rental property, such as appliances, furniture, and fittings. A quantity surveyor can prepare a tax depreciation schedule to maximise these claims.

  
  

What You Cannot Claim:

• Purchase Costs: The initial cost of acquiring the property, including stamp duty, legal/conveyancing fees, and initial building inspections. These costs are generally factored into the Capital Gains Tax (CGT) calculation when you sell the property.

• Travel Expenses: Generally, travel costs related to inspecting, maintaining, or collecting rent for a residential investment property are not deductible unless you are carrying on a business of letting rental properties.

• Improvements vs. Repairs: While repairs are immediately deductible, improvements or renovations that enhance the property's value or desirability are considered capital expenses and depreciated over time.

• Private use: If you use the property for private purposes for part of the year, or rent it out at less than commercial rates, your deductions will be proportionately reduced.

  
  

3. Negative and Positive Gearing:

• Negative Gearing: This occurs when the deductible expenses associated with the property (especially interest on the loan) are more than the rental income generated. The resulting loss can usually be offset against your other taxable income (like salary and wages), reducing your overall tax liability. Investors often pursue negative gearing with the expectation of significant capital growth when the property is eventually sold.

  
  

• Positive Gearing: This is when the rental income exceeds the property's expenses, resulting in a profit. This profit is added to your assessable income and taxed at your marginal rate.

  
  

4. Capital Gains Tax (CGT):

• When you sell an investment property, you may be liable for Capital Gains Tax (CGT) on any profit made. The capital gain is the difference between the sale price and the property's cost base (purchase price plus certain acquisition and holding costs, minus depreciation claimed).

  
  

• If you've owned the property for more than 12 months, individuals may be eligible for a 50% CGT discount, which reduces the taxable amount of the capital gain.

  
  

• CGT generally applies to investment properties, not your main residence (subject to certain conditions).

5. Record Keeping:

• Accurate and detailed record-keeping is crucial. You must keep records of all income and expenses for at least five years to substantiate your claims in case of an ATO audit. This includes receipts, invoices, bank statements, and any depreciation schedules.

  
  

Important Considerations:

• Genuinely Available for Rent: To claim deductions, your property must be genuinely available for rent. This means actively advertising and seeking tenants at market rates.

  
  

• Vacant Land: Special rules apply to vacant land, and you generally cannot claim deductions for expenses incurred in holding land before the property can be occupied and is available for rent.

  
  

• Professional Advice: Tax laws can be complex. It is highly recommended to consult with a qualified tax professional or accountant for personalised advice regarding your specific circumstances to ensure you are claiming all eligible deductions and meeting your tax obligations.

This information is general in nature and should not be considered tax advice. Always consult with a qualified professional.

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