Key takeaways
If you own an investment property and rent it out, you can write off a number of costs on your annual tax return.
You can write off loan establishment fees, amortisation of lenders mortgage insurance, title search fees charged by your lender, fees for preparing and filing mortgage documents, mortgage broker fees, strata fees, council rates, property management fees, land tax.
If your borrowing costs are less than $100, you can claim the full amount in the income year you incur the expense. If your total borrowing expenses are more than $100, you spread the deduction over the shorter of either five years or the term of the loan.
The ATO's main concern is to make sure that any deductions claimed with respect to holiday homes rented out for part of the year are correctly apportioned. If you rent out part of your home, you must declare the income and any costs associated with the income are proportionally deductible.
If you own an investment property and rent it out, you can write off a number of costs on your annual tax return.
This includes claiming a deduction for any borrowing expenses incurred and any cost incurred for arranging finance to purchase it.
Tax time is a big bonus for many Aussies with rental properties, but it's important to know exactly where the line is drawn and the fees that you can and cannot write off.
Rental fees you can and cannot claim
Here’s a rundown of the fees or costs that you can write off at the end of the financial year:
- Loan establishment fees
- Amortisation of lenders mortgage insurance (insurance taken out by the lender and billed to you)
- Title search fees charged by your lender
- Costs for preparing and filing mortgage documents (including legal fees)
- Mortgage broker fees
- Fees for a valuation required for loan approval
- Stamp duty charged on the mortgage
- Strata fees
- Council rates
- Property management fees
- Land tax
And here are the fees that you cannot include on your tax return:
- Stamp duty on the transfer of the property title (unless you live in the ACT, where it is deductible) - this is added to the capital gains tax cost base of the property when you sell it.
- Insurance premiums associated with the loan and
- Borrowing expenses are where the loan is taken out for private purposes (for example, it is used to purchase your family home).
- If the property ownership name differs from the name on the loan then this can also reduce the interest tax deductibility of the loan.
The $100 rule
If your borrowing costs are $100 or less, you can claim the full amount in the income year you incur the expense.
But if your total borrowing expenses are more than $100, you spread the deduction over the shorter of either five years or the term of the loan.
Whereas, if you obtained the loan part way through the income year, you need to adjust your claim according to the number of days in the year you had it.
You can also claim a deduction for the balance of the borrowing expenses in the final year of repayment if you either repay sooner than the term of the loan or repay it in less than five years.
What else can I claim for my rental property?
The fees themselves aren’t the only thing that property investors can put on their tax returns.
Here’s a list of the other costs that property investors can claim:
1. Repairs
The cost of repairs can be claimed in full in the year they are incurred and an improvement must be depreciated over its useful life.
It is not always easy to ascertain whether a cost is a repair or improvement or both, so you should obtain tax advice in many situations.
Claims to immediately recoup damage repair costs on newly purchased rental properties rather than claiming them over a number of years (as is appropriate for tax deductions) will raise red flags.
2. Capital gains (or losses)
If you sell your investment property you will need to calculate the capital gain (or loss) - if your property is owned for over 12 months you will benefit from a 50% general discount if purchased with the intention to own the property as an investment. Don’t forget to add back accumulated building depreciation as this will change your cost base.
If you purchased the property with the intention to sell it at a profit, you can’t claim this CGT discount.
3. Personal costs of renting holiday home or room
This accounts for holiday homes and if you rent out part of your home.
The ATO’s main concern is to make sure that any deductions claimed with respect to holiday homes rented out for part of the year are correctly apportioned.
If you rent out your holiday home, carefully apportion your expenses taking into account whether the property was rented at a rate below market (to friends or family), whether it was available for rent during peak periods, if the owners unreasonably refused tenants and whether the owners genuinely took steps to find tenants during periods it wasn’t occupied.
Similarly, if you rent part of your home, you must declare the income and any costs associated with the income are proportionally deductible.
The renting of a room or the total property on say Airbnb must also be reported to the tax office.
You cannot double dip.
Also, any deduction claims on a jointly owned property should be claimed jointly by both property owners, not just the owner with the higher taxable income.
The onus is on the taxpayer to prove a tax deduction is legitimate and in the absence of this proof, the ATO will simply deny the deduction.
The ATO found that many taxpayers failed to produce sufficient evidence of expenses claimed.
4. Depreciation
You can claim depreciation on the building and its fixtures and fittings over time.
A quantity surveyor is approved by the ATO to help determine the depreciation schedule for you here.
5. Travel expenses
If you travel to inspect or maintain your investment property, you may be able to claim related expenses, but there are restrictions and conditions, so it's essential to check the rules.
6. Advertising fees
Costs associated with advertising your property for rent are also deductible.
Remember: Keep the record straight
The ATO has sophisticated data matching capabilities which include rental property-related data, and has recently implemented new residential investment property loans (RIPL) and landlord insurance (LI) data matching programs.
This new data gives crucial intelligence to paint a picture of what’s true and accurate in tax returns to ensure income and deductions are correctly reported.
The RIPL and LI programs are part of a broader suite of data-matching programs that includes property management, rental bond and property transaction data, allowing the ATO to address several taxation risks in the investment property market.
So, it's vital to keep accurate records of all expenses related to your investment property to claim these deductions correctly.
Also, tax laws and regulations can change, so it's always advisable to get advice from a qualified tax professional or accountant to make sure you’re up to date.
This will help you avoid getting into hot water with the taxman but also maximise your deductions wherever you can.
