Rental Properties - Deductions & Capital Works

As a Landlord you will incur various expenses in maintaining your residential property for rent. Keeping a list and records of all expenses can be beneficial to a you when preparing your tax return. There are different ways of claiming these expenses. Some of the expenses can be claimed immediately in the year in which they were incurred, some may be claimed over the life of the asset and others over a period of 40 years. There are some expenses which can only be added  to the cost base of the property and benefit from these types of expenses will be realised at the time of sale.   

Immediate Deductions Available:

An immediate deduction may be claimed under ITAA97 s 8-1 for expenses relevant and incidental to the production of rental income. These expenses would normally be claimable from the time property is listed for rental with an estate agent or advertised as available for rent.

• Agent's Commission to manage property.
• Payment of rates and land taxes.
• Cleaning, gardening /lawn mowing, pest control for the period of tenancy.
• Strata title body corporate fees for ongoing administration and general maintenance.
• Repairs and ongoing maintenance.
• Telephone calls, stamps, insurance, advertising, bookkeeping, tax agent and legal fees regarding lease or rent recovery, but not buying and selling.
• costs of attending a property investment seminar, to the extent that costs relate directly to operating  or maximising the return from current investment properties.
• Interest on moneys borrowed to purchase or refinance the property or to effect repairs. Where the taxpayer purchases a property with the intention for deriving income, a deduction for interest and other expenses may be available even if no income is ever derived(Ormiston; 16-740). However such taxpayer may be asked to demonstrate that they purchased the property with the intention of deriving rental income and that they continued to hold it for that purpose.
• Motor Vehicle Expenses in relation to collecting rent, organising repairs, paying expenses, inspecting the property etc. There are various ways to claim motor vehicle expenses. The most popular method is to claim a rate set each year by the tax office between 63 to 75 cents per kilometre based on a “detailed and reasonable estimate” of kilometres travelled.
• Travel Expenses  i.e. airfares and accommodation if the property is in another state. A travel diary and receipts meeting the substantiation requirements would be required if away for more than 5 nights. You must be very careful if you are taking a holiday at the same time. Only the portion related to the inspection of your rental property is deductible.
• Borrowing and mortgage discharge expenses can be claimed over 5 years or the term of the loan, whichever is the shorter period, if costs of these are more than $100 . Expenses less than $100 can be claimed immediately.
• Fees for the use of a safe deposit box to hold title documents.

 

Depreciable Items

• A depreciating asset is a specifically identifiable asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used(ITAA97 s 40-30). Examples of depreciating assets are carpet, ceiling fan, ducted central heating, hot water system, freestanding furniture, kitchen assets, washing machines and television sets etc. In the case of existing premises the landlord should get a Quantity Surveyor's Report for all depreciable assets in the property and fees. The cost of the preparation of this report is also deductible.
• If an asset costs less than $300 , an immediate deduction is available.

 

Capital Works

• Capital Works(Special Building Write Off) Deductions(ITAA97 S 43-20): A deduction can be claimed for certain kinds of construction expenditure. In the case of residential rental properties the deduction would generally be spread over a period of 25 or 40 years from the date of completion. Deductions based on construction expenditure apply to capital works such as:
  • a building or an extension(e.g. adding a room or garage)
  • alterations such as removing or adding an internal wall, or
  • improvements to the property- e.g. building a pergola, patio or carport

Deductions can be claimed only during the periods the property is rented or is available for rent.

Construction costs

Construction costs include the following:

• Architects and engineering fees
• Surveyor Fees
• Building Fees - cost associated with obtaining the necessary approvals from relevant authorities
• Foundation and excavation costs

Excluded costs are:

• The cost of the land
• Landscaping
• Any items of depreciable plant claimable under the depreciable items.

For specific information relating to your circumstances, or if you are considering purchasing a rental property, you should contact our office for specialist advice on 03 5221 3844 or via enquiries@tagwealth.com.au