The most common rental property tax deduction mistakes
Rental property tax deductions are often an Australian Taxation Office (ATO) auditing priority. That’s because many landlords make mistakes with their deductions. Read on to find out all about the most common mistakes and how to avoid them as a Mount Isa landlord.
Data matching
The ATO also has a data-matching program that helps them to identify landlords who overclaim their tax-deductible expenses (and those who fail to declare all of their investment property rental income).
According to the ATO, the most common investment property tax deduction errors are incorrectly claiming:
- renovation/improvement costs as repairs and maintenance costs
- expenses when the property isn’t available for rent
- property loan interest.
In addition, many landlords do not keep records to prove their rental income and associated expense claims.
Let’s take a closer look at these common errors and how you can avoid them.
Incorrectly claiming renovation/improvement costs as repairs and maintenance
Both renovations/improvements and repairs and maintenance costs can generate tax-deductible expenses on an investment property. However, the amount of the tax-deductible expenses that you can claim for each of these types of costs differs significantly. It’s therefore crucial to understand the difference between renovations/improvements and repairs and maintenance costs.
You can read more about this common mistake here.
Incorrectly claiming expenses when the property isn’t available for rent
You can only claim investment property tax deductions if your property is generating rental income (or it’s available to rent but is vacant).
In addition, if you’re not charging a commercial rate of rent to your tenants (for example, if you are giving a discounted rate to a friend or family member), then you may have to adjust your tax-deductible expenses accordingly.
Incorrectly claiming property loan interest
Only the interest on your investment property loan can be claimed as a tax deduction, not any principal repayments. In addition, if you borrow against the equity you have in your investment property and use those funds for private purposes, then the interest on those funds can’t be claimed as a tax deduction either.
Other rental property tax deduction mistakes
According to the ATO, other rental property tax deduction mistakes include:
- Incorrectly claiming investment property purchase or selling expenses
Investment property purchase expenses such as stamp duty and solicitors’ conveyancing can’t be claimed as tax deductions. Instead, they can be added to the cost base of your property to reduce your capital gains tax (CGT) if/when you sell your property. Similarly, investment property selling expenses (such as real estate agent and conveyancing fees) also can’t be claimed as tax deductions. However, like property purchase expenses, they can be used to reduce any capital gain (or increase any capital loss) that you may make if/when you sell your investment property.
- Incorrectly claiming for travel to the investment property
While you may need to travel to your property from time to time (for example, to inspect it, collect rent or do repairs and maintenance), you can’t claim your travel costs as a tax deduction.
- Incorrectly claiming expenses paid by tenants
For example, water or electricity bills. You can only claim investment property expenses that you pay for directly (provided you are not reimbursed by your tenants).
How to avoid common rental property tax deduction errors
There are 2 things you should do:
- Hire a local tax agent who is experienced in rental property tax deductions and working with Mt Isa landlords.
- Keep records and receipts to help your tax agent maximise your tax deductions.
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