There have been a number of common mistakes identified in the tax returns of rental property owners. To help you, ATO has compiled a list of what you should do and common mistakes to avoid.
If you have an overall property loss
If your total rental expenses exceed your gross rental income, you have incurred a net rental property loss. This is often referred to as negative gearing. You will need to show the total net rental property loss at label IT6 on your tax return. The amount of the loss is included in your adjusted taxable income and may be used in calculating various tax obligations, tax offsets and entitlement to other tax related concessions.
The information provided at these questions, along with other income details, is reported to the Department of Human Services. They use this information to determine their customers’ entitlements and obligations, including family assistance and child support.
Construction costs
Certain types of construction costs – including extensions, alterations and structural improvements – can be claimed as capital works deductions. However, the purchase cost of the land on which a rental property is constructed cannot be claimed. Instead, the land forms part of the cost base for capital gains tax purposes.
Deductions can be claimed for the decline in value of some types of depreciating assets in residential rental properties – for example, curtains, blinds, dishwashers, refrigerators, stoves, television sets and hot water systems. However, construction costs are not depreciating assets.
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Common mistakes include:
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Refer to Rental properties (NAT 1729) for a comprehensive list of residential property items and whether they are depreciating assets or capital works. |
Initial repairs and capital improvements
Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property are capital expenditure and may be claimed as capital works deductions over either 25 or 40 years, depending on when the repairs were carried out.
Capital improvements (such as remodelling a bathroom, or adding a pergola) should also be claimed as capital works deductions.
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A common mistake is to claim initial repairs or capital improvements as immediate deductions. |
Interest
If you use a loan facility for both investing and private purposes – for example, to purchase or renovate a rental property and to buy a motor boat – you cannot claim the interest expense on the private portion of the loan (the motor boat).
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A common mistake is to claim a deduction for interest on the private portion of the loan. |
Legal expenses
Conveyancing expenses incurred on the purchase and sale of your property are not deductible. Instead, these form part of the cost base for capital gains tax purposes.
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A common mistake is to claim a deduction for conveyancing costs. |
Travel expenses
Where travel related to your rental property is combined with a holiday or other private activities, you may need to apportion the expenses. You may be able to claim local expenses that are directly related to the property inspection and a proportion of accommodation expenses.
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A common mistake is to claim a deduction for the cost of travel when the main purpose of the trip is to have a holiday and the inspection of the property is incidental to that. |
Apportionment of rental expenses
In some situations, rental expenses may need to be apportioned. For example, if your holiday home is used by you, your friends or your relatives free of charge for part of the year, you are not entitled to a deduction for costs incurred during those periods.
It is also important that you have a clear intention to rent the property. If you made no attempt to advertise the property, or you set the rent so high it is unlikely a tenant could be found, we would find that you had no intention of renting your property and your rental claims would not be allowed.
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Some common mistakes are:
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Deductible borrowing expenses
The correct way to claim borrowing expenses of more than $100 is to spread the deduction over five years, or over the term of the loan, whichever is less. If your borrowing expenses are $100 or less, you can claim the full amount in the income year they are incurred. If you claim your borrowing expenses as a deduction, you cannot include them in your cost base for capital gains tax purposes when you dispose of the property.
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A common mistake is to claim all deductible borrowing expenses in the first year they are incurred. |
Ownership interests
If you purchase a rental property as a co-owner and are not carrying on a rental property business, you must divide the income and expenses for the rental property in line with your legal interest in the property. This is despite any written or oral agreement between co-owners stating otherwise.
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A common mistake occurs when a property is purchased by a husband and wife (as co-owners) and the income and expenses are not split in line with their legal interest in the property. |
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Refer to Rental properties (NAT 1729) for more information on how rental income and expenses should be split between co-owners. |
What records do you need to keep?
You need to keep proper records in order to make a claim, even if you use a tax agent to prepare your tax return or you do it yourself. You must keep records of:
- the rental income you receive and the deductible expenses you pay – keep these records for five years from 31 October or, if you lodge later, for five years from the date your tax return is lodged
- your ownership of the property and all the costs of purchasing/acquiring it and selling/disposing of it – keep these records for five years from the date you sell/dispose of your rental property.
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As capital gains tax may apply if you sell your rental property, we recommend you keep records of every transaction over the period of ownership of the property. This would include contracts of purchase and sale, and conveyance and loan documentation. |
Keeping these records will help you work out your capital gain or loss correctly and ensure you do not pay more tax than you need to.
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For information about easy ways to keep your records, refer to ‘Asset registers’ in Keeping records within part Aof Guide to capital gains tax (NAT 4151). |
Can you elaborate on deductible borrowing expenses?