The ATO is reminding rental property owners that each year it sees some fairly common mistakes being made with the claims made, and the tax outcomes that result, in regard to investment properties. It has therefore released a list of the top 10 stumbles, and how best to avoid them.
1. Apportioning expenses and income for co-owned properties
If you own a rental property with someone else, you must declare rental income and claim expenses according to your legal ownership of the property. As joint tenants your legal interest will be an equal split, and as tenants in common you may have different ownership interests.
2. Make sure your property is genuinely available for rent
Your property must be genuinely available for rent to claim a tax deduction. This means:
- you must be able to show a clear intention to rent the property
- advertising the property so that someone is likely to rent it and set the rent in line with similar properties in the area
- avoiding unreasonable rental conditions.
3. Getting initial repairs and capital improvements right
Ongoing repairs that relate directly to wear and tear or other damage that happened as a result of you renting out the property can be claimed in full in the same year you incurred the expense. For example, repairing the hot water system or part of a damaged roof can be deducted immediately.
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 your capital gain or capital loss when you sell the property.
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 that you can claim at 2.5% each year for 40 years from the date of completion.
If you 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
If your borrowing expenses are over $100, the deduction is spread over five years. If they are $100 or less, you can claim the full amount in the same income year you incurred the expense. Borrowing expenses include loan establishment fees, title search fees and costs of preparing and filing mortgage documents.
5. Claiming purchase costs
