solicitor's fees for the purchase of the property (these are a capital expense, see below)
solicitor's fees for the preparation of loan documents (can be claimed as borrowing expenses)
legal costs associated with resisting land resumption (these are a capital expense, see below)
legal costs associated with defending your title to the property (for example, defending an action by the mortgagee to take possession of the property where you have defaulted under the loan) (these are a capital expense, see below)
Expenses you incur when purchasing/acquiring or selling/disposing of your rental property are capital expenses.
Capital expenses include:
conveyancing costs paid to a conveyancer or solicitor
title search fees, and
valuation fees.
You may be able to include capital expenses when calculating the ‘cost base’ of your property. The cost base of a capital gains tax (CGT) asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with purchasing/acquiring, holding and selling/disposing of the asset. This can help you reduce the amount of CGT you pay when you sell your property.
Barry purchased a rental property for $300,000. The expenses Barry paid that he can claim as a deduction on his next tax return were:
$800 – solicitor's fees for preparation of the lease
$500 – solicitor's fees for preparation of loan documents, and
$400 – stamp duty on the mortgage.
Barry can claim deductions for the $500 solicitor's fees for handling the loan documents and the $400 stamp duty on the mortgage as borrowing expenses. Because the borrowing expenses are over $100, Barry must claim them over five years or the term of the loan, whichever is shorter.
The legal expenses Barry paid that he cannot claim as a deduction (capital costs that may form part of cost base of the property) were:
$1,000 – solicitor's fees for purchase of the property
$12,000 – stamp duty on the transfer of the property, and
You need to keep proper records in order to make a claim, regardless of whether you use a tax agent to prepare your tax return or you do it yourself. You must keep records of:
the rental income you receive and the deductible expenses you pay – keep these records for five years from 31 October or, if you lodge later, for five years from the date your tax return is lodged, and
your ownership of the property and all the costs of purchasing/acquiring it and selling/disposing of it – keep these records for five years from the date you sell/dispose of your rental property.
For information about easy ways to keep your records, refer to 'asset registers' in chapter 3 of part A of Guide to capital gains tax (NAT 4151).
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