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  • Rental property expenses deductible over several years

    Use the links below to find detailed information about expenses for your rental property that may be deducted over a number of years.

    Borrowing expenses

    Deduction for decline in value of depreciating assets

    See also:

    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 (including solicitors' fees) for preparing and filing mortgage documents
    • 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 obtained 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.

    Borrowing expenses you can't claim

    You cannot claim any of the following as borrowing expenses:

    • the amount you borrow for the property
    • loan balances for the property
    • repayments of principal against the loan balance
    • stamp duty charged by your state/territory government on the transfer (purchase) of the property title (capital expense)
    • legal expenses including solicitors' and conveyancers' fees for the purchase of the property (capital expense)
    • stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (you may be able to claim this as a lease document expense)
    • insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
    • borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to invest in a super fund).

    You may be able to include capital expenses in the 'cost base' of your property. This can help you reduce the amount of capital gains tax (CGT) you pay when you sell your property. Expenses you incur when purchasing and selling your rental property are capital expenses.

    Example

    On 3 July 2012, Peter took out a 25-year loan of $300,000 to purchase a rental property. Peter's deductible borrowing expenses were:

    • $800 stamp duty on the mortgage
    • $500 loan establishment fees
    • $300 valuation fees required for loan.

    Peter also paid $12,000 stamp duty on the transfer of the property title. He cannot claim a tax deduction for this expense but it will form part of the cost base of the property for CGT purposes when he sells the property.

    As Peter's borrowing expenses are more than $100, he must claim them over five years from the date he took out his loan for the property. He works out his borrowing expenses' deductions as follows:

    • For the first year, 2012–13, Peter performs the following steps:
      • Step 1: works out the number of days between 3 July 2012 and 30 June 2013 (363)
      • Step 2: works out the number of days in the five-year period from 3 July 2012 to 2 July 2017 (1,826)
      • Step 3: divides Step 1 result by Step 2 result (equals 0.19879)
      • Step 4: multiplies Step 3 result by the borrowing expenses of $1,600 (equals $318). He claims $318 as a deduction on his 2012–13 tax return.
       
    • For each of the following years, 2013–14 to 2016–17, Peter performs the following steps:
      • Step 1: works out the remaining borrowing expenses, by reducing the original borrowing expenses of $1,600 by deductions already claimed in previous years
      • Step 2: works out the number of days in the financial year (remembering any leap years)
      • Step 3: works out the number of days remaining in the five years (this includes the number of days in the year for which he is preparing the tax return)
      • Step 4: divides Step 2 result by Step 3 result
      • Step 5: multiplies Step 4 result by Step 1 result (equals the amount he claims as a deduction on his tax return).
       
    • By the end of the 2016–17 income year, Peter has claimed deductions totalling $1,598.
    • In the final year, 2017–18, Peter performs the following steps:
      • Step 1: works out the remaining borrowing expenses, which equals $2 ($1,600 minus $1,598)
      • Step 2: works out the number of days between 1 July 2017 and 2 July 2017 (equals two)
      • Step 3: works out the number of days remaining in the five years, which equals two (1,826 minus 1,824)
      • Step 4: divides Step 2 result by Step 3 result (equals one)
      • Step 5: multiplies Step 4 result by Step 1 result (equals $2). Thus, he claims a deduction of $2 on his 2017–18 tax return.
       
    End of example

    Depreciating assets costing $300 or less

    For assets costing $300 or less, you can claim an immediate deduction for this cost if you used the asset for a taxable purpose during the income year in which the deduction is available. You can't do this if the asset is part of a set of assets that together cost more than $300. For example, if you buy four dining chairs each costing $250 for your rental property, you can't treat them as separate assets to claim an immediate deduction.

    See also:

    Depreciating assets you can claim

    On this page:

    New assets

    You can claim for assets that are new; not second-hand or used.

    This includes where you purchase a newly built or substantially renovated property, for which 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, or
    • the depreciating assets were installed for use, or used at this property, and you acquired the property within six months of it being newly built or substantially renovated.

    Claiming depreciating assets

    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 1

    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 told Kerrie that she was not entitled to claim a deduction for the decline in value of the depreciating asset 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 assets that were already in it at that time.

    End of example

    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 2

    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 for residential premises

    Limits apply to a deduction for the decline in value of second-hand or used depreciating assets in residential rental properties.

    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, and
    • you installed it into your rental property before 1 July 2017.

    Example 3

    Sharon owns a residential property she has been renting out since September 2015. In March 2017, Sharon 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 4

    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 did not own the asset when it was first installed ready for use.

    End of example

     

    Example 5

    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. It doesn't matter whether the dryer was brand new or previously used.

    End of example

    Home turned into a rental property before 1 July 2017

    You can only claim a deduction for the decline in value of assets in your home used for private purposes if you moved out and turned it into a residential rental property, and both of the following apply:

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

    Example 6

    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 2018 year, Marty cannot claim a deduction for the decline in value for any second-hand depreciating asset that he purchases for 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 useful effective life of the used depreciating assets in it.

    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.

    End of example

     

    Example 7

    Eliza purchased a dishwasher in July 2015 and used it for private purposes at her main residence. In July 2017, 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:

    Depreciating assets you can't claim

    On this page:

    Existing residential rental property purchased on or after 9 May 2017

    You cannot claim a deduction for the decline in value for assets in an existing residential rental property if you entered into a contract to purchase that property on or after 7.30pm (AEST) on 9 May 2017.

    Example 1

    In August 2017, Donna purchased a two-year old apartment and immediately rented it out. A year before Donna purchased the apartment, the previous owner installed new carpet and, upon purchasing the property, Donna installed a second-hand television.

    Donna can't claim deductions for the decline in value of the carpet and the television because they have both been previously used.

    End of example

    Home turned into a residential rental property on or after 1 July 2017

    In this case, you cannot claim a deduction for the decline in value for depreciating assets that were in your home. You can only claim a deduction for the decline in value for any new depreciating assets that you purchase for your residential rental property.

    Example 2

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

    As Kendrick's home was made available for rent on or after 1 July 2017, he is not able to claim a deduction for the decline in value for any remaining useful effective life of the used depreciating assets in it.

    Kendrick can claim a deduction for the decline in value for the new depreciating assets that he purchases for his rental property.

    End of example

    Exceptions – when you can claim

    You can claim a deduction for the decline in value of depreciating assets if any of the following apply:

    • you are carrying on a business of letting rental properties
    • you purchased a second-hand depreciating asset for your residential rental property before 7.30pm (AEST) on 9 May 2017
    • you used a depreciating asset that you acquired before 7.30pm (AEST) on 9 May 2017 and then, before 1 July 2017, you installed it at your residential rental property
    • your rental property is not used to provide residential accommodation; for example, it is let out for commercial purposes (such as a doctor's surgery).
    • the entity that owns the residential rental property is any of the following:
      • a corporate tax entity
      • a superannuation plan (except a self-managed superannuation fund)
      • a public unit trust or managed investment trust
      • a partnership or unit trust if each of its members are a corporate tax entity, superannuation plan (other than a self-managed superannuation fund), public unit trust or managed investment trust
       
    • the income generating activities at your rental property are unrelated to providing residential accommodation (for example, solar panels used in generating income from the sale of electricity).

    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 1

    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 2

    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, or
    • prime cost method – the decline in value each year is a constant amount of the original value.

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

    Example

    Laura purchased a new hot water system for her rental property on 1 July 2017, 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 ÷ 365) × (200% ÷ asset's effective life)

    The decline in value for 2017–18 is $600, worked out as follows:

    1,500 × (365 ÷ 365) × (200% ÷ 5)

    Laura is entitled to a deduction for decline in value of $600. The adjustable value of the asset on 30 June 2018 is $900. This is the cost of the asset ($1,500) less its decline in value up to 30 June 2018 ($600).

    Prime cost method

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

    Asset's cost × (days held ÷ 365) × (100% ÷ asset's effective life)

    The decline in value for 2017–18 is $300, worked out as follows:

    $1,500 × (365 ÷ 365) × (100% ÷ 5)

    Laura is entitled to a deduction equal to the decline in value. The adjustable value of the asset at 30 June 2018 is $1,200. This is the cost of the asset ($1,500) less its decline in value up to 30 June 2018 ($300).

    End of example

    See also:

    Last modified: 03 Dec 2018QC 57524