If you own an investment property and earn rent from it, of course you'll be wanting to claim any expenses you incur while earning said rental income. Unfortunately, the ATO has some pretty strict rules as to what expenses you can claim, and when. Read on for some detailed information on the types of rental property expenses you can claim as tax deductions.
There are two kinds of rental property expenses: ongoing expenses and capital expenses. Generally you can claim both types for a rental property, but each have specific rules regarding how and when you can claim them.
Ongoing expenses must be common and generally accepted expenses with a short-term rather than long-term value. You can usually claim these kinds of expenses whether you're converting your primary residence into a rental property or specifically buying an investment property to rent out. However, you can only claim ongoing expenses once your property is available for rent (regardless of whether you have a tenant).
They can include:
- accounting and financial advice
- body corporate fees
- insurance (including landlord, building and contents insurance)
- bank fees
- interest on loan used to acquire or renovate the property
- property agent management fees
- council rates
- water rates
- land tax
- advertising for a tenant
- cleaning and gardening expenses
- pest control
- some legal expenses
- repairs and maintenance
Ongoing expenses must also be reasonably priced, and generally adhere to the principle of replacing 'like-for-like' so that the expenses is classified as a 'repair' rather than an 'improvement'. For example, having a broken kitchen cabinet repaired is an ongoing 'repair', whereas pulling out all the kitchen cabinets and replacing them with new ones would be considered an improvement, and therefore is a capital expense.
So capital expenses are...?
Capital expenses are anything that increases the value of your property or extends its life, including adding or installing a new item or upgrading an appliance or fixture. Examples of capital expenses would include purchasing a new air conditioner or having the external walls rendered.
Capital expenses, unlike ongoing expenses, have to be deducted over a number of years under depreciation (unless they cost less than $300 - these can be claimed straight away). The improvement is depreciated based on its 'effective life', which is determined by the ATO, and then a percentage of the cost (its decline in value) can be deducted each year in your tax return.
Also, if you have substantial renovations done to your property, like a building or extension, floorplan alterations like adding or removing internal walls, and structural improvements, these a considered 'capital works' and are depreciated over 40 years.
Borrowing expenses including stamp duty, mortgage broker fees and loan establishment fees are also considered capital expenses and can be deducted over a number of years.
There are so many rules around the expenses you can deduct on a rental property, so it's usually best to talk to an accountant if you have any trouble, especially before you buy or sell an investment property or rent out your primary residence, as there may be capital gains tax implications involved. Have a read of our Property Investors Deduction Guide for ideas on what expenses you can claim in your return, or give us a call if you have any questions.