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Rental Property Tax Deductions Overview

One of the most important decisions you will make in your life will be the purchase of an investment property. Therefore, it is crucial that you do it correctly. There are so many aspects to think about, including location, cost, finances, the type of structure to buy in, the manager of the rental property, the effects of taxes, and the list goes on.

It’s critical to surround oneself with the top experts in each of these domains unless you have a depth of knowledge in each of these areas.

The owner of a property, also referred to as the landlord, is typically liable for income tax assessments on all income received but may be allowed to deduct expenses and losses incurred in obtaining that revenue.

Generally, a landlord may deduct the following from their taxes:

  • Publicity & promotion
  • Agent’s fee for obtaining rent collection
  • Accounting/Audit Fees
  • banking fees
  • Costs of borrowing and paying off mortgages
  • Allowance for building write-offs
  • Cleaning
  • Depreciation on fixtures and furniture
  • Gardening
  • insurance costs
  • Interest on borrowed funds used to buy the property
  • lease bonuses
  • preparation, registration, and stamping of leases
  • Legal expenses:
  1. In recouping rental arrears
  2. eviction of noncompliant renters
  3. credit worthiness research and leasing preparation
  • Administration and corporate fees
  • Postage
  • power is present (gas & electricity)
  • Council, water, and land tax rates
  • Repairs and upkeep
  • The cost of a safe deposit box to store title papers
  • Admin and bookkeeping costs
  • Service charges
  • Stationery
  • Costs of tax planning and tax return preparation
  • Telephone
  • Costs of travel and inspection

These are just a few of the various costs a landlord may incur that can be deducted, albeit they are by no means the only ones.

Typical Rental Tax Deductions Detailed Explanation

In principle, all costs required to maintain a rental property are tax deductible. These notes serve two purposes: first, to inform you of the areas we think many taxpayers have encountered difficulties, and second, to explain the Australian Taxation Office’s interpretation of the applicable rules on some of the more prevalent tax deductions that may be claimed.

Interest Subtraction

Instead of the security offered, the use of the borrowed funds determines whether interest is deductible. Simply put, the interest on a loan used to buy an investment property, whether it be commercial or residential,

Tax deductions generally apply to expenses. In contrast, the interest is not tax deductible if the money is utilized for personal expenses.

  • Consider a taxpayer who owns his present home outright. He makes the decision to build a new house for his family to live in while renting out the old one. He uses his previous house as collateral for a loan he takes out to build a new house. The new home was funded by a loan taken out for personal use, so interest on the loan is not tax deductible. The money was used privately, regardless of the fact that he has a mortgage on his previous residence, which he has now chosen to rent. Therefore, he is not qualified for a tax deduction.
  • For instance, it would be necessary to distribute interest payments made on borrowed funds that were partially utilized for private expenditures, such as the purchase of a jet ski. This is true even if there are any

This loan has a rental property as collateral.

The following are a few more factors to think about in relation to the deductibility of interest: –

  1. When an investment property is held in joint names, interest deductions should be divided in accordance with the property’s legal ownership rather than being solely claimed by the partner with the greater income.
  1. If interest is paid in advance for a period of less than 13 months, it is typically deductible in the financial year in which it is paid.
  1. Any voluntary additional payments made to the principal of an investment loan are typically not tax deductible.
  1. The amount of the loan repayments is not included in the tax deduction for any interest paid. Any payments typically includes both interest and principal (unless it is an interest only loan). Only the interest component of any loan repayments should be deducted from taxes.

Repairs and Upkeep

There are typically 2 main categories of repairs that a landlord will need to make.

  1. preliminary fixes at the time of purchase, and
  2. tenant-related damage repairs Let’s examine each sort of repair in more detail.

First fixes made at the time of purchase

Any costs associated with the initial repair of recently purchased property that are related to fixing flaws that already existed at the time of purchase are considered

Capital expenses are typically not deductible from taxes.

However, a taxpayer may be able to deduct the cost of any initial repairs made for building write-offs, and they may also be taken into account when calculating any potential capital gains and/or losses when they sell the property.

tenant-related damage repairs The question that needs to be considered while making such an investment typically revolves around repairs versus improvements.

  • In general, taxpayers are able to write off the cost of maintaining and making repairs to their investment property. Restoring an item to its initial state is the goal of a repair. Such costs can include fixing electrical items, replacing broken windows, or maintaining the plumbing.
  • Taxpayers cannot deduct the cost of any renovations, additions, or upgrades to their investment property from their taxable income. For instance, constructing a garage or carport or setting up an air conditioner. Some of these things might lose value over time.

Depreciation

Depreciation provides a foundation for amortizing an item’s capital cost over its anticipated lifespan. For depreciation calculations, the cost of an item includes both the upfront cost and any installation fees.

1. Improvements

Whenever a substantial expense has an effective life of more than a year, depreciation is typically available as a tax deduction. An air conditioner installation or even the construction of a decking area are two examples.

2. Building blocks

  1. Any items that are a part of the building structure are typically not eligible for depreciation. By taking into account two elements, structural things can be separated from items of plant life or objects.
  1. If an object cannot be removed without inflicting serious harm to the item or the building, it is considered to be a part of the structure of the building. Examples include built-in wardrobes, wall insulation, plumbing, and electrical wiring.

Building Write-Off Percentage

Capital expenses incurred in building and/or improving a rental property may be deducted by the taxpayer. Any capital works that begin after July 17, 1985, are eligible for this deduction.

Any deduction sought for the building costs of specific structures and structural upgrades must be supported by the actual expenses incurred or, in cases where a taxpayer is truly unable to ascertain the real costs, by an estimate from a quantity surveyor.

Valuers, real estate agents, accountants, and solicitors typically lack the necessary training and expertise to provide this kind of estimate, unless they are otherwise qualified.

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