Some legal expenses incurred in producing your rental income are deductible -for instance, the cost of evicting a non-paying tenant.
Most legal expenses, however, are of a capital nature and are therefore not deductible. These include costs of:
- purchasing or selling your property
- resisting land resumption
- defending your title to the property.
Non-deductible legal expenses may, however, form part of the cost base of your property for capital gains tax purposes. For more information see the publication Guide to capital gains tax. See also Capital gains tax in this publication.
Example: Legal expenses
In September 2002, the Hitchmans' tenants moved out owing four weeks rent. The Hitchmans retained the bond money and took the tenants to court to terminate the lease and recover the balance of the rent. The legal expenses they incurred doing this are fully deductible. The Hitchmans were seeking to recover assessable rental income, and they wished to continue earning income from the property. The Hitchmans must include the retained bond money and the recovered rent in their assessable income in the year of receipt.End of example