Rental property deductions for 2007

Over 1.4 million people claimed more than $21 billion in rental deductions in their tax returns for the 2006 tax year, with almost 200,000 people claiming deductions for the first time.

Advice for claiming rental deductions

There are two categories of rental property expenses you can claim:

expenses for the year you paid them, like council rates, repairs, insurance and loan interest, and
expenses that are deductible over a number of years, like borrowing costs, creating structural improvements and costs of depreciating assets.

You cannot claim costs associated with acquiring or disposing of a property, but they may form part of the cost base of the property for capital gains tax purposes.

Renovation costs and costs to repair damage, defects or deterioration existing on purchase cannot be claimed as an immediate deduction. These costs are capital expenditure, depending upon what is repaired or improved, and must be claimed as either decline in value deductions over the asset’s effective life, or as capital works deductions over 40 years.

Common mistakes

There are some common mistakes made by both first-time and other rental owners. These include:

Incorrectly claiming the cost of structural improvements as repairs when they are capital works deductions. Examples of this include remodelling of bathrooms and kitchens, and constructing a deck or pergola.
Overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property. A loan can be taken for both income-producing and private purposes, like to buy a car or go on an overseas holiday. The interest on the private portion of the loan is not tax deductible.
Incorrectly claiming the full cost of an inspection visit when it is combined with a private purpose, like a holiday. Deduction claims can only be made for the portion of the travel that directly relates to the property inspection.
Claiming deductions for rental properties not genuinely available for rent.
Incorrectly claiming deductions for properties only available for rent part of the year. If a holiday home or unit is used by you, your friends or relatives free of charge for part of the year, you are not entitled to a deduction for costs incurred during those periods.
Incorrectly claiming the cost of land as a capital works deduction. The cost of land forms part of the cost base when calculating capital gains tax on the sale of the property.
Incorrectly claiming deductions for depreciating assets that are actually capital works deductions. There is a comprehensive list of more than 230 residential property items setting out whether items are depreciating assets that are eligible for a decline in value deduction, or assets eligible for a capital works deduction. This list appears in the Rental properties booklet (see Help and advice below for details).

Help and advice

We have produced a comprehensive booklet, Rental properties, to help you get it right. You can get a copy from 1 July 2007 by phoning 1300 720 092 or by visiting our website www.ato.gov.au

If you would like to talk to someone at the Tax Office about deductions for rental properties, call 13 28 61.

Last Modified: Thursday, 7 June 2007

Our commitment to you

We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice.

Copyright

This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved.

Requests for further authorisation should be directed to the Commonwealth Copyright Administration, Copyright Law Branch, Attorney-General’s Department, Robert Garran Offices, National Circuit, BARTON ACT 2600 or posted at http://www.ag.gov.au/cca.