Income and deductions for renting out your property

As the end of the tax year approaches, it is time to begin gathering the relevant supporting documents so that you can calculate and substantiate the income and deductions related to renting out your home.

Due to the large increase in overclaimed deductions and a lack of substantiative documentation, the Australian Taxation Office (‘ATO’) has announced that there will be an increased focus on rental properties for the 2024 income tax year. 

The ATO has improved data matching from third parties which includes receiving information from property managers, banks, landlord insurers and sharing economy providers. It is therefore imperative that you accurately disclose the corresponding income and deductions within your tax return.

Rental property owners can claim deductions to the extent that the expenses were incurred to produce rental income.

Common deductions you can claim include:

• Council rates;
• Interest on a loan for the property;
• Electricity, gas and water;
• Property insurance;
• Cleaning and maintenance costs (products used or hiring a commercial cleaner); and
• Fees or commission charged by the platform.

One must also consider the distinction between capital works, depreciating assets and repairs and maintenance.

Deductions for capital works are based on the construction cost of the property when built and include building and structural improvements. These types of improvements often enhance the home or extend the life of the property such as an outdoor patio extension, a sealed driveway or new fencing. Capital works are written off over a much longer time than other depreciating assets.  Items determined to be capital improvements are written off at a rate of 2.5% or 4% depending on the date the construction began, the type of capital works and how they will be used. A quantity surveyor or suitably qualified professional can assist in the preparation of these specialised reports.

A claim for depreciation is based on the effective life of eligible plant, equipment and fixtures. An example of a depreciating asset may be a new hot water system or air conditioning system.

Capital works and depreciation can result in a significant deduction across many years and may be a useful tool in maximising eligible deductions for the time the property is rented.

Repairs restore something to its original condition, such as replacing a faulty lock, fixing a broken window or replacing a damaged fence panel. Maintenance involves the routine upkeep to prevent deterioration such as regular pool cleaning or the upkeep of a garden.  These costs can be claimed as an immediate deduction in the year the expense is incurred.

Record keeping

Whether your records are in paper or electronic form, they should include the following details as a minimum:

• Name, ABN or business name of the supplier;
• Amount of the expense;
• Nature of the goods or services you purchased;
• Date you purchased the goods or services; and
• Date the document was produced.

Renting out part of a home

If you are only renting out part of your home (your main residence), you can only claim a portion of the expenses related to that part of the home. As a general guide the expenses are apportioned by determining the floor-area solely occupied by the renter. An additional deduction can be claimed by adding to that a reasonable amount based on your guest’s access to shared or common areas of the home.

Renting out your home on an occasional basis

If you rent your home for a part of the year, you can claim expenses for that period. The total expenses that you claim must reflect the portion of the tax year that your home was rented out.  If you rent your home for the holiday period, you will need to declare the rental income received in your tax return. You will also need to provide details as to whether all or only part of your home was rented as well as whether or not you were living in the home at the time.

You can claim 100% of any expenses that are only related to renting out your home to paying guests such as fees or commission charged by a platform.

Capital Gains Tax consequences for renting out part or all of your home

Usually, when you sell your home, any profit or gain on the sale is exempt from Capital Gains Tax (‘CGT’) and any loss is disregarded under the main residence exemption. When part or all of your home has been used to produce rental income, you may only be entitled to a partial exemption and are required to work out the proportion that is exempt from CGT.

Common issues surrounding rental deductions:

• Claiming the private portion of interest deductions: If you redraw or refinance a loan for a rental property and the redrawn amount is used to fund private expenditure such as cars, school fees or holidays; then the interest on the redrawn amount cannot be claimed as a deduction. Interest can only be claimed to the extent it relates to the original loan amount. The apportionment between private and investment purposes must continue for the life of the loan.
• Borrowing costs: Loan establishment fees, lender’s mortgage insurance and title search fees are borrowing costs that are generally claimed over a 5-year period or the life of the loan, whichever is less. These costs are not immediately deductible.
• Stamp duty: State or territory stamp duty can’t be claimed as a deduction (except in the Australian Capital Territory). You should keep a record of stamp duty paid as the amount paid is added to the cost base of the property and can reduce a capital gain you may make on the sale at a point in the future.
• Travel: From 1 July 2017, you cannot claim deductions for travel costs incurred in relation to your rental property unless you are in the business of letting rental properties or are an excluded entity. You are also not able to claim travel expenses to inspect a property before you buy it.
• Body corporate funds and general-purpose sinking funds: A deduction can be claimed at the time these expenses are incurred if the funds are used for routine maintenance of common property. However, if these funds require payment to a special purpose fund to pay for a particular capital expense, such as to replace the roof of an apartment building, then these levies will not be deductible until the capital works are completed and the expense has been billed to the body corporate.

RSM Thoughts

The concept of rental income and deductions is not always straight forward or clear cut and at times, can become very complex. When renting out all or part of your home, whether on a short- or long-term basis; the scenarios that many people encounter whilst based on facts may be similar, does not necessarily mean that the tax outcome will be the same. Overall, differences in intention, motivation and personal circumstances may produce different tax outcomes.

FOR MORE INFORMATION

 If you would like to discuss how to correctly substantiate and disclose rental income and deductions in your tax return, please contact your local RSM team to discuss how the tax law can be applied to you.