How can I avoid the ATO’s glare on rental property tax deductions?

Good question, especially with a recent industry report revealing claims for rental property tax deductions contain mistakes in 90% of cases, and the ATO is planning a blitz on landlords.

One common error occurs when an investment loan is refinanced for private purposes and the interest is claimed incorrectly. Other booboos include mistaking capital works as repairs and maintenance and claiming deductions for holiday homes when they are not available for rent.

With the help of the ATO, here is some guidance that can help you avoid common rental property tax mistakes.

  1. Record keeping: You must have evidence of your income and expenses so you can make claims. Capital gains tax could apply when you sell your rental property. Therefore, keep records for the period you own the property and for the five years after you sell the property.
  2. Ensure your property is genuinely available for rent: When claiming a deduction, your property must be genuinely available for rent. If the property is vacant, you must demonstrate a clear intent to find a tenant. This means advertising the property and establishing a weekly rent in line with the prevailing market rate for similar properties in the area.
  3. Initial repairs and capital improvements: You can’t claim initial repairs or alterations as an immediate deduction in the same tax year you paid for the expense. Repairs must relate to wear and tear or other damage as a result of tenants living in the property. Initial repairs for damage that existed before you purchased the property aren't immediately deductible. However, they can be used to calculate your profit when you sell the property.
  4. Claiming purchase costs: You can’t claim deductions for conveyancing fees and stamp duty (for properties outside of the ACT). These costs can be used to determine if you need to pay capital gains tax or not.
  5. Claiming interest on your loan: The interest on an investment loan is tax deductible. However, you can't claim any interest for personal use such as extending the loan to buy a boat, take a holiday or help with paying for an owner-occupied home.
  6. Construction costs: Certain building costs such as extensions, alterations and structural improvements can be claimed as capital works deductions. Generally, it's possible to claim a capital works deduction at 2.5% of the construction cost for 40 years after the construction was finished.
  7. Claiming the correct portion of your expenses: If your rental property rents for below market rate, you can only claim a deduction during that period for the rent you received. You also can’t claim deductions if your family or friends stay free of charge, or if you use the property yourself.
  8. Co-owning a property: If you are a co-owner of a rental property, you must declare your rental income and claim expenses according to your legal ownership of the property.
  9. Getting your capital gains right when selling: When you sell your rental property, you will make either a capital gain or loss. This is the difference between what it cost you to buy and improve the property and the selling price. If you make a capital gain, you will need to include the increase in your tax return for that financial year. If you make a capital loss, it’s possible to deduct it from capital gains in future years.

If you are unsure about any claims in relation to an investment property, be sure to check in with your accountant.