1. Rental Properties Checklist
The following is a list of the common types of expenses which landlords may generally claim as deductions, with additional clarifying comments where appropriate.
The deduction is spread over five years or the term of the loan, whichever is the shorter.
When a rental property is purchased, a deduction (referred to as a "building write-off") may be available for capital expenditure incurred in constructing the property. Building write-off deductions are generally available at a rate of 2.5% p.a. (i.e. over 40 years) on the construction expenditure of the building. "Construction expenditure" is basically expenditure on the construction of the building itself, or the construction of any extension, alteration or improvement to the building.
For residential property, this write-off is only available where construction of the building commenced on or after 18 July 1985. For commercial property, the deduction is available where construction of the building commenced on or after 20 July 1982. In relation to structural improvements, where construction commenced on or after 27 February 1992.
Note – it is common for the original construction costs of the building not to be available to the purchaser, where this occurs the ATO allows the purchaser to obtain the estimate of an appropriately qualified person, such as a quantity surveyor.
Depreciation on furniture, whitegoods etc
When a rental property is purchased, part of the overall purchase price relates to the acquisition of depreciating assets, such as curtains and blinds, carpets, and an oven.
It is quite common for (especially with second hand properties) for no value to have been allocated to these assets in the purchase contract or any other legal documents associated with the purchase.
In attributing a "cost" to depreciating assets in the above circumstances, the ATO advises that the taxpayer can either:
a) obtain an independent valuation that establishes reasonable values for these assets - normally a quantity surveyor; or
b) estimate their own reasonable value for these assets. In estimating these values, consideration should be given to the market value of the asset compared to the purchase price of the property.
Although mortgage insurance is capital in nature and therefore not deductible, it is deductible as a borrowing expense (see above).
Interest can be claimed even in the property's construction phase, as long as the intention was to always use the property for rental.
Lease preparation, registration, stamping
Legal expenses in recovering arrears of rental, evicting defaulting tenants, investigating creditworthiness and in preparing leases.
Power supplied (gas/electricity)
Registration of lease
Repairs on the property are 100% deductible if they are essentially the replacement or renewal of a worn out or dilapidated part of something, but not of the entirety (i.e. the whole).
By contrast, if the expenditure is capital in nature and thus the repair is not deductible (i.e. it is an "improvement), it may qualify as a depreciable item or subject to the "building allowance" write-off (see above). Further it may also be included in the cost base of the property for Capital Gains Tax purposes.
A deduction is not available for expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (i.e. initial repairs).
Replacement of crockery, linen etc
Safe deposit box fees
Secretarial, bookkeeping fees
Note – The costs incurred in inspecting properties with a view to purchase for letting were of a capital nature intended to gain an asset for an enduring nature.
2. Holding costs deductions allowed when property "genuinely available to rent"
If a rental property is vacant for any reason, deductions for holding costs (e.g. interest, land tax and rates) and non-holding costs (e.g. repairs) are still deductible if the property is considered to be "genuinely available for rent." Such efforts may include:
Listing the property with one or more real estate agents;
Placing advertisements in newspapers; or
Letting of the property to friends or relatives (at commercial rates).
It is worth noting that a recent case held that merely placing an "available to rent" sign on a property was not sufficient to demonstrate "genuinely available for rent", thus rental and interest deductions were not available to the owner during the vacant period.