Rental properties and tax time – what you need to know
The Australian Tax Office (ATO) has noted that one of their key focuses this tax year is rental properties. If you have a rental property or receive any sort of rental income it is important to consider the following when lodging or collating information for your tax return.
Rental income – what do I need to declare?
It is important to note that any income received for rent is required to be declared as income in your annual tax return. This includes but is not limited to renting part of your home, short- and long-term rental agreements, leasing of a holiday home and any other rental related income payments eg insurance pay outs. This also includes on-costs reimbursed by your tenant for services incurred as an owner of the property, such as land tax, council rates and fixed costs of utilities. If you co-own the property, the income and expenditure must be reported in accordance with your legal ownership of the property.
Rental deductions – what can I claim a deduction for?
Deductions may be claimed in the year you incur them, or claimed over a number of years, or claimed on sale of the rental property.
Expenses such as council rates, insurance, property management fees, certain repairs and maintenance and interest on investment loans may be claimed as a deduction in the year it is incurred.
Additional expenses such as borrowing costs, capital works or depreciating assets are claimed over a longer period. Borrowing expenses are those that are incurred when you first take out a loan to buy an investment property. Capital works includes things such as a building or an extension, carports and other structural improvements. Depreciating assets include transferrable items costing over $300 such as a new air conditioner or oven.
The amount of the expense that is available as a tax deduction is determined by a number of factors:
- When the property is available for rental use. For example if you rent out your family shack, the days that you use the property for personal use, then the expensed apportioned to this period will not be an allowable deductions, however, will be added to the property cost base for future claim.
- The extent the expense is incurred for producing assessable income. For example, when you rent part of your house, you can only claim a deduction for part of the expense.
- Specifically, it is also important to note that if you refinance or redraw on your investment loan for personal use eg to fund a new car, you can only claim a portion of the interest as some of this is now private.
Selling a rental property
If you sell a property that you have received rent for at any stage of the ownership, you may be liable for Capital Gains Tax (CGT) on the proceeds of the sale.
An important part of the CGT calculation is the cost base. This includes the cost of the property but also other capital costs such as stamp duty, real estate fees, initial repairs and maintenance and legal fees. It is important to keep all records of expenses incurred along the way as some that you cannot claim during your ownership can be beneficial upon sale. This is your friendly reminder to start being organised if you aren’t already! You can read more about this in our latest article from Stuart Clutterbuck.
There are some exemptions and discounts out there that you might be eligible for so it is important to have these discussions with your accountant to ensure you are not missing out on anything you are entitled to.
If you have any questions or want to discuss this further please contact your WLF Advisor, who will work with you to ensure you are declaring all income and most importantly, claiming all eligible expenses.