ATO’s top 10 tips for rental property owners common tax mistakes

The ATO has issued a list of tips that should help rental property owners avoid what it has found are their 10 most common errors.

It says that avoiding these common mistakes will save many taxpayers time and money. A downloadable PDF of this advice is available for you to distribute to clients (click here).

1. Keeping the right records
Your client must have evidence of their income and expenses so they can claim everything they are entitled to. Capital gains tax may apply when they sell their rental property. So they should keep records over the period they own the property and for five years from the date they sell the property.

2. Make sure the property is genuinely available for rent
Your client’s property must be genuinely available for rent to claim a tax deduction. This means they must be able to show a clear intention to rent the property. Advertise the property so that someone is likely to rent it and set the rent in line with similar properties in the area. Advise them to avoid unreasonable rental conditions.

3. Getting initial repairs and capital improvements right
They are not able to claim initial repairs or improvements as an immediate deduction in the same income year they incurred the expense.

  • Repairs must relate directly to wear and tear or other damage that happened as a result of renting out the property. Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings and repairing damaged floor boards, are not immediately deductible. Instead these costs are used to work out the profit when they sell the property.
  • Ongoing repairs that relate directly to wear and tear or other damage that happened as a result of renting out the property, such as fixing the hot water system or part of a damaged roof, are classed as a repair and can be claimed in full in the same income year your client incurred the expense.
  • Replacing an entire structure like a roof when only part of it is damaged or renovating a bathroom is classified as an improvement and not immediately deductible. These are building costs which your client can claim at 2.5% each year for 40 years from the date of completion.
  • If they completely replace a damaged item that is detachable from the house and it costs more than $300 (for example, replacing the entire hot water system) the cost must be depreciated over a number of years.

4. Claiming borrowing expenses
Borrowing expenses include loan establishment fees, title search fees and costs of preparing and filing mortgage documents. If the borrowing expenses are over $100, the deduction is spread over five years. If they are $100 or less, they can claim the full amount in the same income year they incurred the expense.

5. Claiming purchase costs
Your client can’t claim any deductions for the costs of buying their property. These include conveyancing fees and stamp duty (for properties outside of the ACT). If they sell their property, these costs are then used when working out whether they need to pay capital gains tax.

6. Claiming interest on their loan
Your client can claim interest as a deduction if they take out a loan for their rental property. If they use some of the loan money for personal use, such as buying a boat or going on a holiday, it is not permitted to claim the interest on that part of the loan. Your client can only claim the part of the interest that relates to the rental property.

7. Getting construction costs right
It is possible to claim certain building costs, including extensions, alterations and structural improvements, as capital works deductions. As a general rule, a taxpayer can claim a capital works deduction at 2.5% of the construction cost for 40 years from the date the construction was completed. If the previous owner claimed a capital works deduction they are required to give the current owner the information they used to calculate the costs, so it always pays to ask them for this. If they didn’t use the property to produce assessable income, an estimate can be obtained from a professional. However they must be qualified, use a reasonable basis for their valuation, and exclude the cost of the land when working out construction costs.

8. Claiming the right portion of their expenses
If the rental property is rented out to family or friends below market rate, your client can only claim a deduction for that period up to the amount of rent received. They can’t claim deductions when family or friends stay free of charge, or for periods of personal use.

9. Co-owning a property
If your client owns a rental property with someone else, they must declare rental income and claim expenses according to their legal ownership of the property. As joint tenants their legal interest will be an equal split, and as tenants in common they may have different ownership interests.

10. Getting capital gains right when selling
When your client sells their rental property, they will make either a capital gain or a capital loss. Explain that this is the difference between what it cost to buy and improve the property, and what they receive when they sell it. If they make a capital gain, they will need to include the gain in their tax return for that financial year. If they make a capital loss, they can carry the loss forward and deduct it from capital gains in later years.

ATO’s top 10 tips for rental property owners common tax mistakes. ATO’s top 10 tips for rental property owners common tax mistakes. ATO’s top 10 tips for rental property owners common tax mistakes. ATO’s top 10 tips for rental property owners common tax mistakes. ATO’s top 10 tips for rental property owners common tax mistakes