Rental Properties – Claiming Deductions – Avoiding an Audit

ATO targeting rental property owners in 2020

In recent years, the ATO has written to more than 110,000 rental property owners about their entitlements and obligations, to help ensure tax returns are filled in correctly.  You can expect increased scrutiny of your return and possibly an audit.  Audits are expensive, time consuming and rarely does the taxpayer come out unscathed.  So you need to balance your desire for that big fat refund against the need to avoid a tax audit at all costs.

What can I claim straight away?

Some expenses may be immediately deductible in the income year in which they are incurred. For example, you may be able to claim an immediate deduction for interest on a loan used to:

  • purchase a rental property
  • purchase land to build a rental property
  • purchase a depreciating asset for the property – such as an air conditioner; or
  • to finance renovations or home improvements, like a deck.

You can claim a deduction for the costs that you pay to repair and maintain your rental property. For example, replacing part of the guttering or windows damaged in a storm; replacing part of a fence damaged by a falling tree branch; or repairing an electrical appliance.

Tenancy costs such as the preparation of a lease agreement, or costs associated with evicting a tenant are also immediately deductible expenses.

What can I claim over a number of years?

You can claim other expenses over a number of years, including the cost of depreciating assets, structural improvements and most borrowing costs.

Assets that are part of the property such as stoves, refrigerators, air conditioning and hot water systems can be claimed over a number of years as a ‘decline in value’ deduction.

You may also be able to claim the cost of building, construction and structural improvements made by you or a previous owner as a ‘capital works’ deduction, for example adding a room or constructing a retaining wall or fence.

Borrowing costs such as stamp duty charged on a mortgage, loan establishment fees and title search fees charged by the lender usually have to be claimed over a number of years. If these amounts are less than $100 in total they can be deducted immediately. Otherwise, they are generally deductible over five years or over the term of the loan, whichever is less.

What cannot be claimed?

Expenses for which you are not able to claim deductions include:

  • acquisition and disposal costs of the property
  • expenses not actually incurred by you, such as water or electricity charges borne by your tenants
  • expenses that are not related to the rental of a property, such as expenses connected to your own use of a holiday home that you rent out for part of the year, and
  • borrowing expenses or interest on the portion of the loan you use for private purposes like buying a new car.

What if I sold a rental property?

You may have a capital gain or loss that you will need to include in your tax return if you sold a rental property in the 2020 financial year, unless you acquired it before 20 September 1985.  You can also make a capital gain or loss from some capital improvements made since 20 September 1985 to a property you acquired before that date.

Need help?

We can help you with all these areas.  Please ring the office on 03 9585 7555 and ask for Noel or Amanda, or email us onnoel@mktax.com.au

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