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  • Rental expenses you claim over several years

    You can generally claim a deduction over several years for expenses you incur that relate to borrowing, your assets' decline in value and capital works.

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    Borrowing expenses

    You can claim a deduction for borrowing expenses that directly relate to purchasing your rental property. You incur these expenses in taking out a loan for the purchase of your rental property.

    If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is shorter.

    If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year you incur them.

    For a summary of this information in poster format see, Rental properties – Borrowing expenses (PDF, 177KB)This link will download a file.

    For more detail on borrowing expenses you can't claim see, Rental expenses you can't claim

    Borrowing expenses you can claim

    You can claim the following as borrowing expenses:

    • loan establishment fees
    • lender's mortgage insurance (insurance taken out by the lender and billed to you)
    • title search fees charged by your lender
    • costs for preparing and filing mortgage documents (including solicitors' fees)
    • mortgage broker fees
    • fees for a valuation required for loan approval
    • stamp duty charged on the mortgage.

    If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the final year of repayment.

    If you got the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year you had the loan.

    Example: Apportionment of borrowing expenses

    To secure a 20-year loan of $209,000 to purchase a rental property for $170,000 and a private motor vehicle for $39,000 the Hitchman's, paid a total of $1,670 in establishment fees, valuation fees and stamp duty on the loan.

    As the Hitchman's borrowing expenses are more than $100, they must be apportioned over five years, or the period of the loan, whichever is the lesser.

    Also, as the loan was used for both income-producing and personal purposes, only the income-producing potion of the borrowing expenses is deductible. As they obtained the loan on 17 July 2018, they would work out their deductions for the borrowing expenses for the first year as follows:

    Borrowing expenses × (number of relevant days in year ÷ number of days in a five year period) × (amount of rental property loan ÷ total amount borrowed) = deduction for the year.

    Their borrowing expense deductions in the subsequent years should be worked out as follows:

    Borrowing expenses remaining × (number of relevant days in year ÷ remaining number of days in a five year period) × (amount of rental property loan ÷ total amount borrowed) = deduction for the year.

    Example of calculating borrowing expense deduction over a five-year period
    Example of calculating borrowing expense deduction over a five-year period

    Year

    Calculation

    Available deduction for the year

    Year 1

    $1,670 × (349 ÷ 1,826) × ($170,000 ÷ $209,000)

    $260

    Year 2

    (leap year)

    $1,351 × (366 ÷ 1,477) × ($170,000 ÷ $209,000)

    $272

    Year 3

    $1,017 × (365 ÷ 1,111) × ($170,000 ÷ $209,000)

    $272

    Year 4

    $682 × (365 ÷ 746) × ($170,000 ÷ $209,000)

    $271

    Year 5

    $348 × (365 ÷ 381) × ($170,000 ÷ $209,000)

    $271

    Year 6

    $15 × (16 ÷ 16) × ($170,000 ÷ $209,000)

    $12

     

    End of example

    Find out about:

    Capital expenditure

    Capital expenditure you may be able to claim a deduction for over time includes:

    For a summary of this information in poster format see, Rental properties – Repairs, maintenance and capital expenditure (PDF, 177KB)This link will download a file.

    For more detail on repairs and maintenance expenses, see Rental expenses you can claim now.

    Improvements

    An improvement is anything that makes an aspect of the property better, more valuable, more desirable or changes the character of the item on which works are being carried out.

    Improvements include work that:

    • produces a new and different function, or adds to the property a function that it did not previously have
    • generally furthers the income-producing ability or expected life of the property
    • goes beyond just restoring the efficient functioning of the property.

    Improvements can be either:

    Depreciating assets

    Depreciable assets are those items that can be described as plant, that don't form part of the premises. These items are usually:

    • separately identifiable
    • not likely to be permanent and are expected to be replaced within a relatively short period
    • not part of the structure of the building.

    None of these factors alone can determine if an item is part of the premises. They must all be considered together.

    You may deduct an amount equal to the decline in value for the period you held the depreciating asset during the income year.

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    Decline in value of depreciating assets

    A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

    Examples of assets that deductions for decline in value can be applied to include:

    • timber flooring
    • carpets
    • curtains
    • appliances like a washing machine or fridge
    • furniture.

    For example, a washing machine is an asset that wears out over time and you can claim a deduction for the cost of the washing machine spread out over its expected effective life.

    Special rules can apply to some assets that may allow you to claim deductions for their decline in value (depreciation) more quickly.

    When you purchase a rental property, you are treated for tax purposes as having bought a building, plus various separate depreciating assets, such as air conditioners, stoves and other items.

    Some assets don't depreciate, such as land, trading stock and some intangible assets (for example, goodwill).

    An asset that is fixed to, or otherwise part of, a building or structural improvement, will generally be construction expenditure for capital works and only a deduction for capital works may be available for those assets.

    A quantity surveyor will often prepare a report that creates a depreciation schedule for these claims at the time a rental property is purchased.

    The decline in value of a depreciating asset starts when you first use it, or install it ready for use – it doesn't matter whether it is for a private purpose or to earn assessable income. For example, if you purchased a new asset on 1 January and used it only for a taxable purpose, you can claim for the decline in value from that date.

    Your deductions need to be reduced for any personal use of the asset, for example, you use your rental property for private holidays.

    Watch: This video explains depreciating assets and when you can claim them as a deduction for a rental property.

    Media: Claiming depreciating assets
    http://tv.ato.gov.au/ato-tv/media?v=bd1bdiun85ity3External Link (Duration: 02:20)

    Example: Claiming the decline in value of depreciating assets

    Kerrie purchased a unit off-the-plan from a developer as an investment; that is, it was new and no one lived in it prior to that time.

    Kerrie also purchased a residential investment apartment from another developer four months after completion. It was already tenanted when Kerrie purchased it. The developer was not entitled to claim a deduction for the decline in value of the depreciating assets at the property because they were his trading stock.

    Both of the properties included depreciating assets such as curtains and furniture installed before settlement and the transfer of title to Kerrie.

    For the unit, Kerrie is entitled to claim deductions for decline in value of the depreciating assets because no one has lived in it before she purchased it.

    For the apartment, Kerrie is still entitled to claim deductions for decline in value of the depreciating assets (although they have been used by the tenants) because both of the following apply:

    • no one could claim any deductions for decline in value of the depreciating assets
    • the property was supplied to Kerrie within six months of being built.

    If Kerrie had entered into the contract to buy this apartment after six months of it being newly built, she would not have been entitled to claim a deduction for the decline in value for any of the depreciating assets that were already in it at that time.

    End of example

    Depreciating assets costing $300 or less

    For assets costing $300 or less, you can claim an immediate deduction (that is, a full deduction) for this cost in the income year you used the asset for a taxable purpose.

    You can't claim an immediate deduction if the asset is part of a set of assets that together cost more than $300. For example, you can't claim immediate deduction if you buy four dining chairs each costing $250 for your rental property because you can't treat them as separate assets.

    Depreciating assets you can claim

    Depreciating assets you can claim a deduction for include:

    New assets

    You can claim decline in value for new assets but not for second-hand or used assets.

    This includes your purchase of a newly built or substantially renovated property, if no one was previously entitled to a deduction for the decline in value of the depreciating asset, and either:

    • no one resided at the property before you acquired it
    • the asset was installed for use, or used at this property, and you acquired the property within six months of it being newly built or substantially renovated.

    Substantial renovations

    Substantial renovations of a rental property are renovations in which all or substantially all, of a building is removed or is replaced. This could include the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

    For renovations to be substantial, they must directly affect most rooms in a building. The removal and replacement of the exterior walls, the removal of some internal walls, and the replacement of the flooring and the kitchen in a house are considered collectively to amount to substantial renovations.

    Example: Claiming the decline in value of renovations

    Jake bought a four bedroom residential property in October 2017 with the intent of it being a rental property. Three months before selling, the previous owners removed a wall between two bedrooms and turned the space into a large bedroom with an ensuite. They also repainted and recarpeted the room.

    Even though Jake acquired the property within six months of the renovations being completed, the renovations only affected a part of the house, and aren't classified as being substantial renovations. In this case, Jake can't claim a deduction for the decline in value of the depreciating assets in the property.

    However, if Jake buys any brand new depreciating assets for the property, he will be able to claim a deduction for their decline in value.

    End of example

    Limit on a deduction for the decline in value of second-hand depreciating assets

    If you use second-hand assets to earn rental income from your residential rental property, you can't claim a deduction for their decline in value unless:

    • you are using the rental property in carrying on a business (including a business of letting rental properties), or
    • you are :
      • a corporate tax entity
      • a superannuation plan that is not a self-managed superannuation fund
      • a public unit trust
      • a managed investment trust, or
      • a unit trust or a partnership, if each of its members are entities of a type listed above at that time during the income year.
       

    Otherwise, you can only claim deductions for second-hand or used depreciating assets in residential rental properties if both of the following apply:

    • you purchased the asset before 7.30pm on 9 May 2017
    • you installed it into your rental property before 1 July 2017.

    Second-hand assets are depreciating assets previously installed ready for use or used:

    • by another entity
    • in your private residence
    • for a non-taxable purpose.

    Example: Claiming the decline in value of second-hand assets

    Sharon has been renting out her residential property since September 2015. In March 2017, she purchased a second-hand fridge to replace the fridge that had broken down.

    Because Sharon purchased the second-hand fridge for her rental property before 7.30pm on 9 May 2017, she can claim a deduction for the decline in value for any remaining effective life of the asset.

    End of example

     

    Example: Tim's rental property

    Sue purchased her house in 2009. In October 2017, she listed her house for sale. While it was advertised, she moved out and then replaced the carpet. No one lived in the house while it was advertised. The house was then sold to Tim. After purchasing the property, Tim rented it out immediately.

    Tim can't claim a deduction for the decline in value of the depreciating assets in the property because they are all previously used. Also, he cannot claim a deduction for the decline in value for the carpets because he didn't own the asset when it was first installed ready for use.

    End of example

     

    Example: Deductions for the decline in value over the effective life of a second-hand depreciating asset

    Don purchased a second-hand clothes dryer and installed it in his residential rental property on 8 May 2017. Assuming the dryer had five years of remaining effective life, Don can claim deductions for its decline in value for five years because he had purchased it before 9 May 2017.

    End of example

    Home turned into a rental property before 1 July 2017

    If you turned your home into a residential rental property, you can only claim a deduction for the decline in value of assets in it if both of the following apply:

    • you purchased your home before 7.30pm on 9 May 2017
    • you turned your home into a residential rental property before 1 July 2017.

    Example: Deductions for decline in value over the effective life – assets bought after 9 May 2017

    At the start of 2016, Marty purchased a home as his main place of residence. In June 2017, Marty moved out and rented out the property fully furnished, which included the furniture and fittings he had been using while living there.

    As Marty rented out his home before 1 July 2017, and he purchased it before 7.30pm on 9 May 2017, he can claim a deduction for the decline in value for any remaining effective life of the used depreciating assets in it.

    However, from the 2017–18 income year, Marty cannot claim a deduction for the decline in value of any second-hand depreciating asset that he purchases for, or installs ready for use in, this property on or after 7.30pm on 9 May 2017.

    If Marty moved out in June 2017 and the property was vacant until it was available for rent after 30 June 2017, he is not able to claim a deduction for the decline in value for any remaining effective life of the used depreciating assets in it.

    End of example

    However, if Marty purchased a new asset for the rental property after he moved out, he can claim a deduction for its decline in value as the asset was not previously used.

    Example: Deductions for decline in value – asset used privately

    Eliza purchased a dishwasher in April 2017 and used it for private purposes at home (her main residence). In July 2019, she installed this dishwasher in her residential rental property. Eliza can't claim deductions for the dishwasher's decline in value because:

    • she had previously used it privately, and
    • she installed it in her rental property after 30 June 2017.
    End of example

    See also:

    Carrying on a business of letting rental properties

    Your income from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business, as such activities are generally considered a form of investment rather than a business.

    Whether a business is carried on must be answered based on a wide survey and the extent of your involvement in the activities. No one indicator is decisive. They must be considered in combination and as a whole.

    Some of the factors considered in determining whether you carry on a business of letting rental properties are:

    • the total number of residential properties that are rented out
    • the average number of hours per week you spend actively engaged in managing the rental properties
    • the skill and expertise exercised in undertaking these activities
    • whether professional records are kept and maintained in a businesslike manner.

    Example: Not carrying on a business of property investing

    Saania owns 16 rental properties, 14 of which are managed by real estate agents. Saania frequently attends personally to rental property matters, such as collecting rent and arranging for repairs to be done, She also undertakes regular analysis to measure the financial performance of her rental properties.

    Saania is not carrying on a business of property investing because the activities are no more than letting properties.

    End of example

    Example: Carrying on a rental property business

    Mr and Mrs Smith own a number of rental properties either as joint tenants or equal tenants in common. They own eight houses and three apartment blocks. Each block comprises six residential units. So, they own a total of 26 rental properties. The Smiths actively manage all of the properties. They devote a significant amount of time to these activities – an average of 25 hours per week each. They undertake all financial planning and decision-making in relation to the properties. They interview all prospective tenants and conduct all of the rent collections. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done.

    The Smiths are carrying on a rental property business. This is indicated by the following factors:

    • the significant size and scale of the rental property activities
    • the number of hours they spend on the activities
    • their extensive personal involvement in the activities
    • the business-like manner in which the activities are planned, organised and carried on.
    End of example

    Calculating deductions for decline in value

    To work out your deduction for decline in value, use either the:

    • diminishing value method – the decline in value each year is a constant proportion of the remaining value, hence, you are claiming higher deductions in the early years of its effective life
    • prime cost method – the decline in value each year is a uniform amount of the original value over its effective life, hence, you are claiming a lower but more constant proportion each year.

    Depreciating assets valued at less than $1,000 can be grouped in a low-value asset pool and depreciated together.

    Example: Calculating deductions for decline in value

    Laura purchased a new hot water system for her rental property on 1 July 2019, for $1,500. It has an effective life of five years. She can choose to use either the diminishing value or prime cost method.

    Diminishing value method

    The formula for the annual decline in value using the diminishing value method is:

    Asset's cost × (days held ÷ 366) × (200% ÷ asset's effective life)

    The decline in value for 2019–20 is $600, worked out as follows:

    1,500 × (366 ÷ 366) × (200% ÷ 5)

    Laura is entitled to a deduction for decline in value of $600.

    The adjustable value of the asset on 30 June 2020 is $900. This is the cost of the asset ($1,500) less its decline in value up to 30 June 2020 ($600).

    Prime cost method

    The formula for the annual decline in value using the prime cost method is:

    Asset's cost × (days held ÷ 366) × (100% ÷ asset's effective life)

    The decline in value for 2019–20 is $300, worked out as follows:

    $1,500 × (366 ÷ 366) × (100% ÷ 5)

    Laura is entitled to a deduction for decline in value of $300.

    The adjustable value of the asset at 30 June 2020 is $1,200. This is the cost of the asset ($1,500) less its decline in value up to 30 June 2020 ($300).

    End of example

    See also:

    Initial repairs

    Costs you incur to remedy defects, damage or deterioration that existed at the time you acquired the property are considered to be capital in nature. Depending on what the expenditure was for, these may be classified as capital works or capital allowances.

    Capital allowances

    For each of the assets where you may claim a deduction for decline in value, you can choose to use either the effective life the Commissioner has determined for such assets, or your own reasonable estimate of its effective life. Where you estimate an asset’s effective life, you must keep records to show how you worked it out.

    Capital works

    Capital works is used to describe certain kinds of construction expenditure on buildings, structural improvements, extensions and alterations. You can claim capital works deductions for a rental property that satisfies certain conditions. Deductions for residential rental properties would generally be spread over a period of 25 or 40 years.

    Examples of capital works where a deduction can be claimed include:

    • building construction costs
    • the cost of alterations, such as removing or adding an internal wall
    • major renovations to a room
    • adding a fence
    • building extensions – for example, adding a garage or patio
    • structural improvements – such as adding a gazebo, carport, sealed driveway, retaining wall or fence.

    Your total capital works deductions can't exceed the construction costs. No deduction is available until the construction is complete.

    You can only claim deductions for the period during the year that the property is rented or genuinely available for rent.

    If your rental property is destroyed, for example by fire, resulting in a total loss of the asset, you can deduct an amount in the income year in which the capital works are destroyed. You can claim a deduction for all the construction expenses that have not yet been deducted. However, you must reduce this deduction amount by any insurance and salvage receipts.

    See also:

    Damaged and destroyed property

    Rental properties and business premises

    Find out about:

    Repairs on a newly-acquired rental property

    Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property can't be claimed as an immediate deduction but may be claimed over a number of years as capital works deductions.

    Replacing an asset

    If you replace assets such as a complete fence or building, you may be able to claim the cost as capital works.

    If you replace depreciating assets such as a dishwasher or carpets, you may be able to claim the cost as deductions for decline in value.

    Example: Replacing assets in a residential property

    Janet has owned and rented out a residential property since 12 January 1983. In 2019, she replaced the old kitchen fixtures, including the cupboards and appliances. The old cupboards had deteriorated through water damage and wear and tear.

    The kitchen cupboards are separately identifiable capital items with their own function. This means the cost of completely replacing them is a capital cost. Because of this, Janet can claim:

    • capital works deductions for the construction cost of this work
    • deductions for the decline in value of the new kitchen appliances (none of these appliances were previously used).

    This is the case regardless of whether:

    • new fittings are of a similar size, design and quality as the originals
    • new cupboards are made from a modern equivalent of the material used in the originals
    • layout and design of the new kitchen may be substantially the same as the original.
    End of example

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    For more information about how tax applies to rental properties, refer to:

    Last modified: 01 Jul 2020QC 23636