The types of legal expenses you can claim as income tax deductions
You can claim the cost of:
- evicting a non-paying tenant
- expenses incurred in taking court action for loss of rental income
- defending a damages claim in respect of injuries suffered by a third party on your rental property
You cannot claim the cost of:
- 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
- valuation fees (when it is a private valuation conducted by your solicitor)
- stamp duty on the transfer of the property.
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.
Example
In September, Barry's tenants moved out, owing four weeks rent. Barry retained the bond money and took the tenants to court to terminate the lease and recover the balance of the rent. The legal expenses he incurred in doing this are fully deductible. Barry was seeking to recover assessable rental income. He must include the retained bond money and the recovered rent in his assessable income in the year of receipt.
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
- 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.
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As a capital gains tax (CGT) may apply if you sell your rental property, we recommend you keep records of every transaction over the period of ownership of the property. This would include contracts of purchase and sale, and conveyance and loan documentation.
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Keeping these records will help you work out your capital gain or loss correctly and ensure you do not pay more tax than you need to.
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For information about easy ways to keep your records, refer to part A of Guide to capital gains tax (NAT 4151) - 'Keeping records' - 'Asset registers'.
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For more information about other rental property expenses you can claim, refer to the following:
For help in applying this information to your own situation, phone us on 13 28 61 between 8.00am and 6.00pm Monday to Friday.
Last Modified: Tuesday, 3 January 2012