If you’ve got a real estate investment then you want to make sure you’re doing the right thing when it comes to lodging your tax return. With the end of the financial year upon us it is a fitting time to review some of the ATO’s major do’s and don’ts for claiming rental property deductions.
1 – DO Keep good records to claim your rental property deductions.
Your most important DO is to keep your records. Without receipts and supporting evidence to make your claims you can find yourself in hot water in the event of an ATO audit. With the ATO continuing to set their sights on the high claims being made for rental properties, keeping good records enables you to maximise your claims within the law.
2 – DON’T claim for personal use of real estate property.
One of the biggest blunders that people make when making claims for their rental property is claiming 100% of their costs, even when the property isn’t 100% used as a rental property. This often happens with short-term rentals that are also used as a personal holiday house, or where an owner or a family member lives in the property for part of the year.
The mortgage is one area that can be a particular mine field. Just because the mortgage is held against a rental property, this doesn’t mean that it is automatically deductible. What matters is what the money from the mortgage was used for. This means if the mortgage was used for mixed purposes you must apportion it. If you later redraw from the mortgage for personal purposes this will also mean you need to apportion the interest expense for personal use. When use becomes so mixed as to make it impossible to determine how much of the mortgage actually relates to the rental, the ATO can even deny a deduction in full.
3 – DO keep proper records for Capital Works and Capital Allowances deductions.
If you purchase an asset (such as a stove or curtains) for your rental property, these costs are not immediately deductible. Normally these are claimed as capital allowances, or more commonly known as depreciation, over the life of the asset.
Previously when you purchased a rental property you would pay for a Quantity Surveyor’s report. This report outlines capital works (claiming some of the costs of building the house) and capital allowances deductions that you can claim on the assets that come with you purchase of a property. HOWEVER some very big changes came into place from the first of July 2017 regarding second hand assets. These laws mean that property investors, other than businesses carrying on a business of property investing, or excluded entities, can only claim depreciation on brand new assets that are immediately used for the investment property. This means no more depreciation is allowed on the acquisition of second hand assets, or for new assets that are initially used for private purposes. A Quantity Surveyor will still be to provide any capital works claims (if the building meets the requirements for these).
4 – DON’T claim for travel costs to get to and from your rental property.
There was a time that you could claim for travel to inspect or make repairs to your rental property. However with people claiming thousands of dollars to drive long distances or even fly to their properties the ATO changed the law so that from July 1 2017 no travel costs were deductible anymore (other than those incurred and claimed by a real estate agent acting on your behalf). Even though the new law has been in place for a full financial year already, it was amongst one of the most common mistakes made in 2018 tax returns.
5 – DO Speak to a qualified tax agent about your particular rental property investment circumstances.
We’ve only touched on some of the major concerns when it comes to claiming deductions for rental properties. Even within these concerns there are a number of issues that can impact your specific situation. That’s why it’s best to check with your tax agent rather than lodging claims for yourself. Make sure you tax agent is up to date with real estate property laws so they can maximise your deductions without making ineligible claims.
* A qualified Tax Agent can save you time and money, but you should still do your own research. Please note that Zac McHardy is not giving any legal or financial advice *