To ensure that you take advantage of every tax break to which you are entitled, it is critical that your tax return be prepared correctly. You may be able to claim a significant portion of your expenses; but, the ATO does keep a close eye on things and is exceptionally good at identifying fraudulent or "unsubstantiated" claims. Let's go over some of the fundamentals that will assist guarantee that you get the tax deductions you are entitled to for your vacation rental property and that you claim your expenses in the correct manner.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
Which of the following are deductible costs related to your current rental?
In most cases, you are eligible to claim an instant deduction against the income you earned during the current year for the costs associated with the administration and upkeep of the property. This includes the interest you paid on loans.
If your property is negatively geared, you could be able to deduct all of your rental expenses from your rental revenue as well as other types of income, like salary and wage income and company income.
Expenses that you can claim for this current year
You are only eligible to claim a deduction for these costs if you personally bear them and the tenant does not contribute to their payment.
The following are examples of expenses that could potentially qualify for an immediate tax deduction for you in the same tax year that you incurred them:
- advertising for prospective renters
- fees paid to the body corporate
- council rates
- the cost of water
- land tax
- cleaning
- gardening and lawn mowing
- pest control
- insurance (including both the building itself and its contents and public liabilities)
- interest expenditures
- pre-paid expenditures
- fees and commissions charged by real estate agents
- protection against loss of income insurance
- alterations, improvements, and upkeep
- certain legal expenditures.
Interest expenses
You may be eligible for a deduction equal to the total amount of interest paid on a loan used to purchase a rental property, or you may be allowed to deduct just a portion of that total amount. Nevertheless, throughout the tax year in which you make your claim for a deduction, the property must either be rented out or be truly available for rental.
What you can claim
You are eligible to receive a deduction for the interest that was paid on the loan that was utilized to:
- purchase a property to be used as a rental;
- invest in a depreciating item for the rental property, such as buying an air conditioner for the rental property, for instance;
- repairs must be made to the rental property (for example, damage to the roof caused by a storm must be repaired);
- finance the remodelling of the rental property, which is either rented out at the moment or will be rented out in the near future (for example, to add a deck to the back of the rental property);
- You are also eligible to receive a refund for any interest that you have pre-paid for a period of up to a year in advance.
What you can’t claim
The following types of interest-related costs are not eligible for a tax deduction:
- during any length of time during which you used the property for private purposes, regardless of how brief that period was;
- on the amount of the loan that you spend for personal reasons, whether you did so when you initially took out the loan or when you refinanced it (for instance, the money that you use to buy a new automobile or invest in a retirement fund);
- If you don't utilize the new home to earn revenue, you can't use a loan to buy a new home, even if you use your rental property as collateral for the loan. This is true even if you use the rental property to buy a new home.
- if there is any portion of the loan that you utilize for personal reasons, regardless of whether or not you are current with your repayments.
Owners of Rental Properties: Here Are Some Tips to Help You Avoid Common Tax Mistakes
The Australian Taxation Office (ATO) is sending out a reminder to owners of rental properties that it observes a number of fairly typical errors being made each year with respect to the tax claims that are made and the outcomes that arise in reference to investment properties. The Australian Taxation Office (ATO) is issuing a caution to owners of rental properties because it observes some very typical tax mistakes being made with investment property claims.
Allocating costs and income for jointly owned properties
If you jointly own a rental property, you must report rental revenue and deduct expenses in accordance with your share of the property's legal ownership. Although you may have separate ownership interests as tenants in common, your legal interest will be split equally as joint tenants.
Running a rental property business together
The majority of rental activities are investments rather than company operations. The net rental income or loss, however, must be divided in accordance with the partnership agreement if you are operating a rental property business in collaboration with others. If a partnership agreement doesn't exist, each partner should receive an equal share of the net rental income or loss.
Utilizing borrowing costs
If your borrowing costs total more than $100, you can deduct them over a five-year period. You can deduct the entire amount in the same tax year you incurred the expense if it is $100 or less. Loan establishment fees, title search fees, and the cost of creating and submitting mortgage documents are examples of borrowing charges.
Making a loan interest claim
If you borrow money to purchase your rental property, you can deduct the interest from your taxes. You cannot deduct the interest paid on a portion of the loan if you use it for personal expenses like travelling or buying a boat. Only the portion of the interest related to the rental property may be asserted by you.
Making a purchase cost claim
The expenses incurred in purchasing your home are not deductible. These include stamp duty and conveyancing fees (for properties outside the ACT). These expenses are then taken into account when determining whether you must pay capital gains tax if you sell your property.
Including the proper amount in your expense claims
You may only deduct for that time period the rent you actually got if you rent out your rental property to relatives or friends below market value. When your family or friends stay for free or at times when you use the space for personal purposes, you cannot claim deductions.
Correcting the construction cost
Certain building expenses, such as additions, modifications, and structural upgrades, are eligible for capital works deductions. Generally speaking, you have 40 years from the date the construction was finished to claim a capital works deduction at a rate of 2.5 percent of the construction cost.
If someone else previously owned your property and they claimed capital works deductions, ask them for the information so you can accurately calculate the deduction you are eligible to claim. If the former owner won't divulge those facts, you might hire a trained expert to make an estimation of the previous building costs.
Making basic fixes and major enhancements correctly
You can deduct the full cost of ongoing repairs that are directly related to wear and tear or other damage that resulted from renting out the property in the same year that the expense was spent. Repairing the hot water system or a portion of a damaged roof, for instance, can be immediately subtracted.
Initial repairs, such as replacing broken light fixtures and fixing harmed floors, for damage that already existed when the property was purchased are not immediately deductable. Instead, these expenses are utilized to determine whether you made a profit or a loss when you sold the property.
Renovation of a bathroom or replacement of an entire structure, such as a roof when only a portion of it is damaged, is considered an improvement and is not immediately deductible. For 40 years from the date of completion, you may deduct these construction costs at a rate of 2.5 percent annually.
Any repair that costs more than $300 to totally replace and is separate from the home (such as replacing the entire hot water system) must be depreciated over a period of time.
Managing your capital gains when you sell
You can experience a financial gain or loss when you sell your rental property. This is typically the gap between the price you paid to purchase and enhance the property and the amount you actually receive when you sell it. Your expenses, such as depreciation and capital improvements, cannot be deducted from rental income generated by the property. You must report any capital gains in your tax return for that income year if you do so. If you have a capital loss, you can carry it forward and subtract it from future capital gains.
Maintaining accurate records
For as long as you own the property and for at least five years after the filing date of your tax return for the year in which you sell it, you must preserve records of all transactions and occurrences that pertain to your investment property.
To claim everything they are entitled to, your client needs proof of their earnings and outgoings. In order to make all of your rightful claims, you must have proof of your income and spending. Selling your rental property may subject you to capital gains tax. Therefore, keep records for as long as you possess the property and for five years beyond the date you sell it.
Ensure that your rental property is actually available for rent.
To be eligible for a tax deduction, your client's property must actually be offered for rental. They must be able to demonstrate a clear intent to rent the property, in other words. The home should be advertised to attract renters, and the rent should be competitive with those of nearby residences of a similar size. Tell them to stay away from exorbitant renting terms.
For you to be eligible for a tax deduction, your property must really be offered for rent. This implies:
- You must be in a position to demonstrate a clear desire to lease the property;
- promoting the property to attract renters and setting the rent competitively with those of nearby homes of a similar size;
- staying away from oppressive renting terms.
Some Advice for Owners of Rental Properties
Depending on the specifics of your situation, the following kinds of records can be among the ones you need to keep:
Quantity Surveyors can provide you with a report on depreciation.
In order to generate a report explaining the amounts of capital allowances you can claim in each year for those goods if you rent your property, a quantity surveyor must assess the value of construction works and depreciable items.
If the residential property in question was constructed after the 15th of September in 1987, you may be eligible to make a claim for a deduction on capital works, sometimes known as building. The costs of construction can be deducted over a period of forty years, beginning on the day that the building was finished built, at a rate of 2.5 percent each year (for instance, if the initial costs of construction were $350,000, you can deduct $8,750 every year).
If you buy a property that has recently been constructed, you may be entitled to take a tax a deduction for depreciable assets, which are often referred to as plant and equipment. These are things that can be easily removed from the property and have a limited useful life, examples of which include appliances, hot water systems, security systems, air conditioning assets, and other similar things. The amount of the claim is directly proportional to the useful lifetime of these assets.
You are able to enjoy the benefits of considerable tax deductions by claiming capital allowances, and you do not need to make any monetary outlays in order to do so (since the costs were already included in the purchase price of the property).
Check with the Tax Practitioners Board and the Australian Institute of Quantity Surveyors to see if a prospective Quantity Surveyor is registered as a tax agent and has received accreditation from those organizations before hiring them (TPB).
Maintain Accurate Records
Obtaining ownership of the property:
- Purchase agreement or paperwork relating to the transfer;
- Settlement statement;
- Stamp duty paid on acquisition;
- Invoices for the payment of legal fees and any other costs associated with the purchase;
- Information regarding the property loan, including any charges associated with setting up the loan.
Property ownership:
- Prepare bank statements in connection with the property loans;
- payments made toward the property's land tax, rates, and strata levies;
- Expenses related to property insurance;
- A detailed accounting of all other expenses and receipts (e.g. costs of legal disputes, insurance payouts).
(you should keep track of these expenditures even during the times when your property is not available for rent because they may have an impact on the cost base of the property for capital gains tax purposes)
Investing in the improvement and maintenance of your home:
- invoices for corrective and preventative maintenance and other types of repairs;
- receipts for the costs of significant construction, renovating, and upgrade projects;
- bills for the landscaping and earthwork that was done;
- Invoices for garden maintenance;
- receipts and invoices for any and all products that have been acquired for your property.
(See to it that the bills include a comprehensive explanation of the job that was carried out. Request that your provider itemizes the invoice whenever it is possible.
Putting your home or property up for rent:
- The date on which the property first began producing income that might be taxed;
- Dates to indicate the beginning and termination of any periods during which the property was rented out, utilized as your primary residence, or used for any other reason;
- Expenses related to depreciation and capital improvements can be deducted from rental income.
Putting your property up for sale:
- Sale contract and settlement statement;
- Invoices for the costs of legal representation, marketing, and commissions on sales made through agents;
- Receipts for the costs of renovating, staging, and other expenses incurred in order to sell the property
Maintain a "clean" status for all of your investment property loans.
To the degree that the money borrowed was utilized to acquire, repair, and maintain the property, the amount of interest that you can deduct from your rental revenue (or capitalize as part of the cost base) is restricted. It is possible that the portion of the interest payment that is related to the component of the loan that was used for other purposes will not be deductible.
Mixed-purpose loans may be a commercial reality; nonetheless, they may limit your capacity to manage the loan balances associated with each of the objectives for which the loan was taken out. Your loan repayments will, in most cases, be distributed among the many parties involved in the loan in a proportional manner. You are not able to select the precise balance that you would like to pay down initially.
Your accountant will need to spend time each month calculating the apportionment if you make frequent drawdowns on property loans for purposes that are unconnected to one another, which may cause an increase in the costs associated with tax compliance.
If necessary, you should have a market valuation done on your home.
Let's say you decide to start renting out the property that you've been using as your primary residence ever since you bought it. In this scenario, you are considered to have acquired it on the day that it first started producing income that is subject to taxation at the market value on that day (if it occurred after 20 August 1996). When something like this occurs, you could be required to get a market valuation done in order to determine the cost base of your property.
The following are some additional scenarios in which you might want a market valuation:
- You obtained your property without paying anything in exchange for it (e.g. as a gift).
- Your property was purchased by the person who passed away prior to the 20th of September in 1985, and you received it as an inheritance.
- A connected third party was either the buyer or the seller of the property (e.g. family or friends).
- You decide that rather than keeping the property as an investment asset for the purpose of generating rental income, you will instead engage in development and/or subdivision for the purpose of selling the land.
- Before May 8, 2012, you had an investment property in Australia while you were either a non-resident or a temporary resident, and during that time you were in either of those categories.
When calculating your capital gains for tax purposes, you should work with a certified professional valuer. Property selling price suggestions and other types of informal appraisals are not acceptable pieces of evidence in the eyes of the ATO. A retrospective assessment of the market's value is possible.
Instalments and deductions made on a pay-as-you-go basis
PAYG instalments
If you expect to have a tax burden at the end of the year and you make a profit from renting out your property, you might be required to make payments as you go (PAYG) instalments toward that obligation.
In most cases, you will be required to make PAYG payments in instalments if you fall into one of the following categories:
- you reported gross income from business or investments (including income from rentals) of $4,000 or more (or $1 if you are a foreign resident) on your most recent tax return;
- Your income tax assessment shows that you have a tax balance due that is greater than $1,000.
PAYG withholding
You might be able to lower the amount of tax that is withheld from your standard pay or wages if the investment property you own has a negative gearing, which means that its operating costs are higher than its net income (the PAYG withholding rate). This may assist your year-end tax liability be more in line with your expectations (rather than paying too much throughout the year).
You have the ability to submit a request for a downwards modification in your PAYG withholding rate if you believe that you require a lower rate of withholding.
The Australian Taxation Office (ATO) has provided a set of guidelines for owners of rental property whose incomes have recently been impacted by the coronavirus, bushfires, floods, or other events that occurred during the financial year. These guidelines are intended for owners whose incomes have been negatively impacted.
Assistant Commissioner of the ATO Karen Foat stated that maintaining accurate records of all expenditures was the most crucial first step to take, regardless of the circumstances.
The ATO recommended that you count rent as income at the time it was received; hence, you were only required to report the rent that you had already been paid as income.
The agency advised us that we do not need to include these payments until we have actually received them even if the payments from our renters are being postponed until the following fiscal year.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
Although owners may see a decrease in rental income, they will continue to be responsible for the typical costs associated with their rental property. As long as the lower rent charged is established at arms' length, taking into consideration the present conditions of the market, they will still be allowed to deduct these expenses on their tax return.
Individuals who have the intention of constructing a rental property on unoccupied land but have not yet begun construction on the rental property will no longer be able to deduct expenses related to holding vacant land beginning in the year 2020.
The ATO stated that this did not apply to land that was used in a business or if there had been an unusual incident such as a fire or flood that led to the land is unoccupied. The exceptions to this rule include situations where the land became vacant as a result of these events.
If your rental property was damaged in the bushfires and you are in the process of rebuilding it, you may be eligible to receive reimbursement for the costs associated with holding onto your now-vacant land for a period of up to three years while you rebuild your rental property.