Rental Properties

Purchasing a rental property

• When purchasing a financed rental property you may consider:
  o The interest on the debt is deductible in contrast to the interest on the debt for your main residence. From a tax deductibility perspective it may pay to consider maximising the debt on the rental property and minimising the debt on your main residence
  o If your planned rental property is to be negatively geared (i.e. expenses greater than income) and jointly owned, from a tax deductibility perspective it may pay to consider the ownership portions of the rental property to maximise tax effectiveness
• When purchasing a rental property outright:
  o If your planned rental property is to be positively geared (i.e. income greater than expenses) and jointly owned, from a taxable income perspective it may pay to consider the ownership portions of the rental property to maximise tax effectiveness
• When purchasing a rental property make sure you keep copies of the following for any potential, future capital gains calculations:
  o Copy of purchase contract
  o Copy of settlement sheet
  o Details of any expenses relating to the purchase
  o Copy of your finance documentation, if applicable
• Make sure that you get a depreciation schedule, if applicable
• Make sure that you take out a landlords insurance policy, if applicable

Changing your main residence into a rental property

• When you change the status of your main residence to a rental property:
  o The interest on any outstanding mortgage on the property becomes deductible at the balance amount as at the date that it becomes a rental property
  o All other expenses for the property become deductible from the date that it becomes a rental property
  o If the property is negatively geared (i.e. expenses greater than income), then the rental losses will become deductible against other income according to ownership
  o If the property is positively geared (i.e. income greater than expenses), the surplus needs to be declared as income in tax returns according to ownership
• Make sure that you get a written valuation for the property at the time it becomes a rental as this may be useful when calculating potential capital gain at a later stage
• Make sure that you get a depreciation schedule, if applicable
• Make sure that you take out a landlord’s insurance policy, if applicable

Disposal of a rental property

• When disposing of a rental property make sure you keep copies of the following for any potential capital gains calculations:
  o Copy of sale contract
  o Copy of settlement sheet
  o Details of any expenses relating to the sale

Income

• Any income received from a rental property needs to be declared as income in tax returns according to ownership

What’s deductible

• Any expenses incurred in the process of renting a property are deductible, they may include but are not limited to:
  o Advertising for tenants
  o Bank charges
  o Body corporate fees and charges
  o Borrowing expenses
  o Capital works
  o Cleaning
  o Council rates
  o Decline in value of depreciating assets
  o Gardening and lawn mowing
  o Insurance – building, contents and public liability
  o Interest expenses
  o Land tax
  o Legal expenses (excluding acquisition costs and borrowing costs)
  o Pest control
  o Phone
  o Property agent fees and commissions
  o Repairs and maintenance
  o Special building write off
  o Stationery and postage
  o Water charges
• If your rental property is a holiday house that you use personally for part of the year, expenses will need to be apportioned according to the personal use and claimed as a percentage of the total

Depreciation 

• There may be two types of depreciation available as a deduction depending on the age of the rental property:
  o Depreciation of plant and equipment
  oThis is a claim for the decline in value over the defined lifetime of each of the fixtures and fittings included in the property
  o Division 43 Capital works allowance
  oThis is a claim to write off the initial construction cost of the rental property
  oThis may or may not be available depending on the age of the property
• In order to claim depreciation as an expense it is highly recommended that you have the rental property assessed and a deprecitation schedule completed
• The cost of having a depreciation schedule completed becomes a deductible expense
• A number of our clients have used and we recommend, BMT Tax Depreciation for this service:
  o BMT Tax Depreciation
     Quantity Surveyors
     Phone: 1300 728 726
     www.bmtqs.com.au

Information required for your tax return

• We have a downloadable spread sheet for you to record your rental property income and expenses here
• We have a checklist for you to make sure that you have all of your rental property details together for your return here

Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.