Tax time tips for property owners: understanding deductions and depreciation

Landlords, it’s almost tax time. Do you know which expenses you can claim and how you should claim them?

Many landlords fail to make the most of their tax-deduction entitlements. So, we asked Stuart Waugh, a director at the Sydney-based financial advice and accountancy firm Altus Financial, to talk us through it all.

A little planning can mean making the most of your tax-deduction entitlements.Credit: iStock

What deductions can landlords claim?

Rental expenses that you can claim as deductions come in two categories, Waugh says:

• Expenses for which you can claim a deduction now (in the income year you incur the expense) — for example, interest on loans, landlord insurance, council rates, repairs and maintenance, and depreciating assets costing $300 or less.
• Expenses for which you can claim a deduction over several years (or decades), including capital works (such as a new fence or driveway), borrowing expenses (such as lender’s mortgage insurance), and the decline in value of depreciating assets (such as curtains and appliances).

“It is important to claim each expense under the correct expense type to make sure you treat it correctly for tax purposes,” Waugh says.

What’s the difference between repairs and improvements?

Fixing something and improving your property are very different things in the taxman’s eyes.

Repair and maintenance expenses, Waugh says, are costs you incur to:

• Keep your property in a tenantable condition.
• Fix wear and tear or damage that occurs while you’re renting out your property.

These can be claimed as a deduction in the tax year in which they were incurred. Simple.

However, “some repairs are considered capital in nature and must be claimed over several years”, Waugh says. This may include:

• Initial repairs for defects that existed at the date you acquired the property.
• Improvements (such as remodelling a bathroom), which are capital works.

“The rate of deduction for these capital works is generally 2.5 per cent or 4 per cent per year, spread over a period of 40 or 25 years, respectively,” Waugh says.

How does depreciation work?

Some assets in your rental property, such as curtains and appliances, decline in value over their lives. The taxman allows you to claim a deduction for this.

“We recommend you keep a spreadsheet, as a minimum, for your depreciating assets as part of your record keeping,” Waugh advises. “A quantity surveyor can prepare a report at the time a rental property is purchased.”

There are more than a few complicating factors when it comes to claiming depreciation. For example, you can choose either the tax commissioner’s determination of how long an item’s effective life is or your own; there are special rules around claiming depreciation of second-hand assets; and some items can be depreciated more quickly than others.

“By this point, most landlords have decided it’s probably a good idea to hire an accountant,” Waugh says.

What deductions do landlords most commonly fail to claim?

“The most commonly missed deductions are depreciation and land tax,” Waugh says.

“Depreciation as it’s a non-cash deduction, in that the depreciable items are usually within the purchase price. Land tax, because the onus is on the taxpayer to register for a land tax liability.”

Land tax liability can sneak up on a property owner, as their land value increases and edges over the land tax threshold, Waugh explains.

What are some expenses that landlords believe they can claim, but actually can’t?

Sadly, you can’t claim a deduction for:

• Expenses not actually paid by you, such as electricity charges paid by your tenants.
• Acquisition and disposal costs, including the purchase cost, conveyancing and advertising costs (though on the bright side, these are usually included in the property’s cost base, which would reduce any capital gains tax when you sell the property).
• GST credits for anything you buy to lease the premises (however, when claiming the expense as a deduction, you claim the total amount you’ve paid).
• Deductions for vacant land (in most cases).

What records do landlords need to keep?

You need to keep a record of all your income and expenses relating to your rental property.

If you’ve got a property manager, they’ll do this for you, and at the end of each tax year, present you with a nice, neat summary report.

You’ll be so grateful for this that you might even forgive them their management fees (which, by the way, are deductible too.)

Terri Scheer is Australia’s leading landlord insurance specialist. For more information, visit terrischeer.com.au.

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