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You can generally claim an immediate deduction against your current year’s income for your expenses related to the management and maintenance of the property, including interest on loans.
If your property is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income, such as salary and wages and business income.
Expenses you claim this year
You can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.
Expenses you may be entitled to claim an immediate deduction for in the income year you incur them include:
- advertising for tenants
- body corporate fees and charges
- council rates
- water charges
- land tax
- cleaning
- gardening and lawn mowing
- pest control
- insurance (building, contents, public liability)
- interest expenses
- pre-paid expenses
- property agent’s fees and commission
- income protection insurance
- repairs and maintenance
- some legal expenses.
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Interest expenses
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If you take out a loan to purchase a rental property, you can claim a deduction for the interest charged on the loan or a portion of the interest. However, the property must be rented out or genuinely available for rent in the income year you claim a deduction.
What you can claim
You can claim the interest charged on the loan you used to:
- purchase a rental property
- purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
- make repairs to the rental property (for example, roof repairs due to storm damage)
- finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)
You can also claim interest you have pre-paid up to 12 months in advance.
What you can’t claim
You can’t claim a deduction for interest expenses you incur:
- for any period you used the property for private purposes, even if it’s a short period of time
- on the portion of the loan you use for private purposes either when you took out the loan or if you refinanced (for example, money you use to purchase a new car or invest in a super fund)
- on a loan you used to buy a new home if you don’t use the new home to produce income, even if you use your rental property as security for the loan
- on any portion of the loan you use for private purposes, even if you are ahead in your repayments.
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Thin capitalisation
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If you are an Australian resident and you (or any associate entities) have certain international dealings, overseas interests, or if you are a foreign resident, the thin capitalisation rules may apply if your debt deductions, such as interest (combined with those of your associate entities) for 2019–20 are more than $2 million.
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Pre-paid expenses
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Pre-paid expenses are those that provide for services extending beyond the current income year, such as payment of an insurance premium on 1 January that provides cover for the entire calendar year.
You can generally claim an immediate deduction in the current income year for:
- pre-paid expenses of less than $1,000
- expenses of $1,000 or more where the service period is 12 months or less (such as payment of an annual insurance premium part way through an income year).
A prepayment that doesn’t meet these criteria may have to be spread over two or more years.
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Repairs and maintenance
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You may be able to claim a full deduction for the cost of repairs and maintenance in the year that you incur them if:
- the expense directly relates to wear and tear or other damage that occurred as a result of renting out property, and the property
- continues to be rented on an ongoing basis
- remains available for rent but there is a short period when the property is unoccupied – for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.
What you can claim immediately
Repairs
Repairs means working to make good or remedy defects in, damage to or deterioration of the property. Generally, repairs must relate directly to wear and tear or other damage that occurred as a result of renting out the property.
Examples of repairs include:
- replacing broken windows
- replacing part of the gutter damaged in a storm
- replacing part of a fence damaged by a falling tree branch
- repairing electrical appliances or machinery.
Maintenance
Maintenance means work to prevent deterioration or fix existing deterioration. Maintenance generally involves keeping your property in a tenantable condition.
Examples of maintenance include:
- repainting faded or damaged interior walls of a rental property
- oiling, brushing or cleaning something that is otherwise in good working condition – for example, oiling a deck or cleaning a swimming pool
- maintaining plumbing.
What you can claim over several years
Repairs and maintenance unrelated to wear and tear or damage
You can’t claim the total costs of repairs and maintenance in the year you paid them if they did not relate directly to wear and tear or other damage occurring due to renting out your property. These are capital expenses you may be able to claim over a number of years as capital works deductions or deductions for decline in value.
Improvements
You can’t claim a deduction for the total cost of improvements to your rental property in the year you incur them.
An improvement is anything that makes an aspect of the property better, more valuable, more desirable or changes the character of the item on which works are being carried out.
Capital improvements (such as remodelling a bathroom or adding a pergola) should be claimed as capital works deductions.
Improvement means work that:
- provides something new
- generally furthers the income-producing ability or expected life of the property
- goes beyond just restoring the efficient functioning of the property.
Improvements can be either capital works where it is a structural improvement or capital allowances where the item is a depreciating asset.
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Legal expenses
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What you can claim
You can claim the cost of the following as income tax deductions:
- evicting a non-paying tenant
- expenses incurred in taking court action for loss of rental income
- defending a damages claim regarding injuries suffered by a third party on your rental property.
What you can’t claim
You can’t claim the cost of the following as income tax deductions:
- solicitor’s fees for the purchase of the property (these are a capital expense)
- solicitor’s fees for the preparation of loan documents (these can be claimed as borrowing expenses)
- legal costs associated with resisting land resumption (these are a capital expense)
- legal costs associated with defending your title to the property (for example, defending an action by the mortgagee to take possession of the property where you have defaulted under the loan – these are a capital expense).
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Disclaimer: This is general information only and is subject to change at any time. Your complete financial situation will need to be assessed before acceptance of any proposal or product. The Content provided herein has been prepared for informational purposes only. The Content does not constitute tax, legal or accounting advice and should not be relied upon as such. You should seek tax, legal or accounting advice before acting or relying on any Content.
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