When you own a rental property, you'll have a number of expenses in maintaining it and renting it out.
The following expenses can be deducted from your rental income for tax purposes.
Rates and insurance
You can claim the rates and insurance on your rental property.
If you borrowed money to finance your rental property, you can claim the interest charged on this money. However, you can't claim all the interest as an expense if you borrowed the money for another purpose as well as buying the rental property. For example, if the loan is to finance the rental property and the house you live in, you can only claim the interest which relates directly to the rental property.
Agent's fees and commission
If you use an agent to collect the rent and/or maintain the property, you can deduct the cost of the agent's fees. Commission paid to an agent to find tenants for the property is also deductible.
Repairs and maintenance
The cost of any repairs and maintenance that you do (or pay someone else to do) on the rental property is normally deductible as an expense. Examples of repairs and maintenance are: • replacing a broken shower head • plastering and painting a crack in the wall • replacing a blown element in a hot water cylinder • redecorating the property to return it to the state it was in when you bought it to use as a rental property.
If you carry out repairs yourself, you can't claim for your time making repairs as an expense, only for the materials you purchase. There are some circumstances when the cost of repairs can't be deducted as an expense because they're considered a capital improvement. • If you buy a rundown property and spend large sums of money on significant improvements or alterations before renting it out, you can't claim the costs as an expense. • If you carry out work which significantly improves the property, you can't claim the costs as an expense, for example, if you take down a badly deteriorated wall and put a conservatory in its place. This is a capital expense and the cost of the work is depreciated. From the 2011-2012 income year, depreciation on buildings reduces to 0% where buildings have an estimated useful life of 50 years or more. This applies regardless of when the building was acquired. In some situations it can be difficult to work out whether work done on the property is repairs and maintenance or capital improvements.
Motor vehicle expenses
If you use your own vehicle in the course of renting out your property (for example, travelling to inspect a property or to do some repairs), you may be able to claim some vehicle running costs as an expense against your income.
You can deduct as an expense any fees that you incur in: • arranging a mortgage to finance the rental property • drawing up a tenancy agreement • any bank administration fee for the mortgage • the cost of a valuation required to obtain a mortgage. (A valuation acquired for insurance purposes isn't deductible.)
Legal fees in buying or selling a rental property are deductible as long as your total legal expenses for an income year are equal to or less than $10,000.
Mortgage repayment insurance
You can claim a deduction for the cost of any mortgage repayment insurance you have on a mortgage that meets the conditions set out in the section on interest.
If you use an accountant to prepare your accounts you can deduct the cost of the fees. Any fees paid when setting up the rental property, such as investigating the viability of the rental, are not deductible.
Depreciation is an allowance to cover the cost of wear and tear and general ageing of assets used to derive income. You can: • claim a deduction for depreciation on any furniture or fittings that belong to you, or • elect not to claim depreciation. When you sell or dispose of an asset (except a building) for an amount that is different from its adjusted tax value, you're required to account for the difference—either a loss or a gain—in your income tax return.
Expenses that you can't deduct for tax purposes
Capital or private expenses can't be deducted from your rental income. Capital expenses are costs of buying or increasing the value of a capital asset. Private expenses are purchases made for your own benefit and not connected with those producing taxable income. The following are non-deductible expenses: • the purchase price of a rental property • the capital part of any mortgage repayment(s) • interest on money you borrow for some purpose other than financing the rental property, even if you use the rental property to secure the loan • the cost of repairing or replacing any damaged part of the property, if the repairs or replacement make improvements to the property which increase its value • real estate agent's fees incurred as part of buying or selling the property • the cost of making any additions or improvements to the property. A deduction is available for legal expenses incurred in acquiring a capital asset that is used to derive taxable income, provided your total legal expenses for an income year are equal to or less than $10,000.