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  • Rental expenses you can claim now

    You can generally claim an immediate deduction (that is, against your current year's income) for your expenses related to the management and maintenance of the property, including interest on loans.

    If your property is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income, such as salary and wages and business income.

    On this page:

    See also:

    Expenses you claim this year

    Expenses for which you may be entitled to claim an immediate deduction may include:

    Interest expenses

    If you take out a loan to purchase a rental property, you can claim a deduction for the interest charged on the loan or a portion of the interest. However, the property must be rented out or genuinely available for rent, in the income year you claim a deduction.

    For a summary of this information in poster format see, Rental properties – interest expenses (PDF, 197KB)This link will download a file.

    What you can claim

    You can claim the interest charged on the loan you used to:

    • purchase a rental property
    • purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
    • make repairs to the rental property (for example, roof repairs due to storm damage)
    • finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)
    • purchase land on which to build a rental property.

    You can also claim interest you have pre-paid up to 12 months in advance.

    What you can't claim

    You can't claim interest:

    • for any period you used the property for private purposes, even if it's a short period of time
    • on the portion of the loan you use for private purposes either when you took out the loan or if you refinanced (for example, money you use to purchase a new car or invest in a super fund)
    • on a loan you used to buy a new home if you don't use the new home to produce income, even if you use your rental property as security for the loan
    • on any portion of the loan you use for private purposes, even if you are ahead in your repayments.

    If you have a loan you used to purchase a rental property and also for another purpose, such as to buy a car, you can't repay only the portion of the loan related to the personal purchase. Any repayments of the loan are apportioned across both purposes.

    Example: Claiming all interest incurred

    Kosta and Jenny take out an investment loan for $350,000 to purchase an apartment they hold as joint tenants.

    They rent out the property for the whole of the year from 1 July. They incur interest of $30,000 for the year.

    Kosta and Jenny can each make an interest claim of $15,000 on their respective tax returns for the first year of the property.

    End of example

    Example: Claiming part of the interest incurred

    Yoko takes out a loan of $400,000 from which $380,000 is to be used to buy a rental property and $20,000 is to be used to buy a new car.

    Yoko's property is rented for the whole year from 1 July. Her total interest expense on the $400,000 loan is $35,000.

    To work out how much interest she can claim as a tax deduction, Yoko must do the following calculation:

    • Total interest expenses × (rental property loan ÷ total borrowings) = deductible interest

    That is:

    • $35,000 × ($380,000 ÷ $400,000) = $33,250

    Yoko can claim $33,250 as an allowable deduction.

    End of example

    Loan accounts used for private and rental expenses

    If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and is used for both private purposes and rental property expenses, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan. You must separate the interest that relates to the rental property from any interest that relates to the private use of the fund.

    Example: Interest incurred on a mortgage for a new home

    Zac and Lucy take out a $400,000 loan secured against their existing home to purchase a new home.

    Rather than sell their existing home, they decide to rent it out.

    They have a mortgage of $25,000 remaining on their existing home which is added to the $400,000 loan under a loan facility with sub-accounts – that is, the two loans are managed separately but are secured by the one property.

    Zac and Lucy can claim an interest deduction against the $25,000 loan for their original home, as it is now rented out.

    They can't claim an interest deduction against the $400,000 loan used to purchase their new home as it's not being used to produce income even though the loan is secured against their rental property.

    End of example

    Example: Interest incurred on fund redrawn from the loan

    Tyler has an investment loan for his rental property with a redraw facility. He is ahead on his repayments by $9,500 which he can redraw. On 1 July, Tyler decides to redraw the available amount of $9,500 and buys himself a new TV and a lounge suite.

    The outstanding balance of the loan at end of the income year is $365,000 and total interest expense incurred is $19,000.

    Tyler can only claim the interest expense on the portion of the loan relating to the rental property using the following calculation:

    • Total loan balance − redraw amount = rental property loan portion

    That is:

    • $365,000 − $9,500 = $355,500

    To work out how much interest he can claim, he does the following calculation:

    • Total interest expenses × (rental property loan portion ÷ loan balance) = deductible interest

    That is:

    • $19,000 × ($355,500 ÷ $365,000) = $18,505
    End of example

    Thin capitalisation

    If you are an Australian resident and you (or any associate entities) have certain international dealings, overseas interests, or if you are a foreign resident, the thin capitalisation rules may apply if your debt deductions, such as interest (combined with those of your associate entities) for 2017–18 are more than $2,000,000.

    See also:

    Pre-paid expenses

    Pre-paid expenses are those that provide for services extending beyond the current income year, such as payment of an insurance premium on 1 January that provides cover for the entire calendar year.

    You can generally claim an immediate deduction in the current income year for:

    • pre-paid expenses of less than $1,000
    • expenses of $1,000 or more where the service period is 12 months or less (such as payment of an annual insurance premium part way through an income year).

    A prepayment that doesn't meet these criteria may have to be spread over two or more years.

    See also:

    Repairs and maintenance

    You may be able to claim a full deduction for the cost of repairs and maintenance in the year that you incur them if:

    • the expense directly relates to wear and tear or other damage that occurred as a result of renting out property and the property  
      • continues to be rented on an ongoing basis
      • remains available for rent but there is a short period when the property is unoccupied – for example, where unseasonable weather causes cancellations of bookings or advertising in unsuccessful in attracting tenants.
       

    For a summary of this information in poster format see, Rental properties – Repairs and maintenance and capital expenditure (PDF, 172KB)This link will download a file.

    For more detail on capital expenditure and improvements see, Rental expenses you claim over several years

    Watch: This video explains what you need to know before claiming a deduction for repairs and improvements to your property.

     Media: Getting repairs and capital works right
     http://tv.ato.gov.au/ato-tv/media?v=bd1bdiun85itx8External Link (Duration: 02:32)

    What you can claim immediately

    Repairs

    When we say 'repairs', we mean work to make good or remedy defects in, damage to or deterioration of the property. Generally repairs must relate directly to wear and tear or other damage that occurred as a result of renting out the property.

    Examples of repairs include:

    • replacing broken windows
    • replacing part of the guttering damaged in a storm
    • replacing part of a fence damaged by a falling tree branch
    • repairing electrical appliances or machinery.

    Maintenance

    When we say 'maintenance', we mean work to prevent deterioration or fix existing deterioration. Maintenance generally involves keeping your property in a tenantable condition.

    Examples of maintenance include:

    • repainting faded or damaged interior walls of a rental property
    • oiling, brushing or cleaning something that is otherwise in good working condition – for example, oiling a deck or cleaning a swimming pool
    • maintaining plumbing.

    What you can claim over several years

    Repairs and maintenance unrelated to wear and tear or damage

    You can't claim the total costs of repairs and maintenance in the year you paid them if they did not relate directly to wear and tear or other damage occurring due to renting out your property. These are capital expenses you may be able to claim over a number of years as capital works deductions or deductions for decline in value.

    See also:

    Improvements

    You can't claim a deduction for the total cost of improvements to your rental property in the year you incur them.

    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.

    Capital improvements (such as remodelling a bathroom or adding a pergola) should be claimed as capital works deductions.

    When we say 'improvement' we mean work that:

    • provides something new
    • 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 capital works where it is a structural improvement or capital allowances where the item is a depreciable asset.

    Example: Property improvements

    Tim replaced a fibre cement sheeting wall inside his property because it was damaged by tenants. He replaced the old wall with a brick feature wall.

    The new wall is an improvement because Tim did more than just restore the efficient function of the wall. This means Tim cannot claim the cost of the new wall as a repair, but he can claim it as capital works deductions.

    However, had Tim replaced the fibro with a current equivalent, such as plasterboard, he could have claimed his costs as a repair. This is because it would have merely restored the efficient function of the wall without changing its character, even though a different material was used.

    End of example

    Repairs vs improvements

    If you conduct a project that includes both repairs and improvements to your property, you can only claim an income tax deduction for the cost of your repairs if you can separate the cost of the repairs from the cost of the improvements.

    If you hire a builder or other professionals to carry out these works for you, we recommend you ask for an itemised invoice to help work out your claim.

    Example: Apportioning expenses between repairs and improvements

    Caitlin has modernised her rental property by hiring tradespeople to render and paint the external walls. She also asked the painter to paint the internal walls, which had deteriorated during the time she rented out the property.

    As Caitlin requested an itemised invoice from the painter, she could separate the cost of the internal and external painting, and rendering. Due to this, she could claim an income tax deduction for the cost of painting the internal walls as a repair. She could claim the costs for the external walls as capital works deductions.

    End of example

    It is important to correctly categorise each expense you incur to ensure it is treated correctly for tax purposes. Our quick reference guide in the table below will help you to determine which category your expense relates to.

    Determine the category of your rental property expense

    Situation

    This is likely to be…

    An example of this would be…

    And should be claimed on the rental schedule at…

    Are you replacing something that is worn out, damaged or broken as a result of renting out the property?

    Repair

    • replacing part of a fence damaged in a storm
    • getting in a plumber to fix a leaking tap

     

    Repair and maintenance

    Are you preventing or fixing deterioration of an item that occurred while renting out the property?

    Maintenance

    • getting faded interior walls repainted
    • having a deck re-oiled

     

    Repair and maintenance

    Are you repairing damage that existed when the property was bought (whether it was known at the time of purchase or not)?

    Initial repair

    fixing floor boards that had damage when the property was bought

    Capital works or Capital allowances

    Are you purchasing an entire structure that is only partly damaged?

    Capital works

    replacing all the fencing, not just the damaged portion

    Capital works

    Are you renovating or adding a new structure to the property?

    Capital works

    adding a carport

    Capital works

    Are you installing a brand new appliance or floor or window covering?

    Depreciating asset

    • buying a brand new dishwasher
    • installing new carpet

     

    Capital allowances

    See also:

    Legal expenses

    What you can claim

    You can claim the cost of the following as income tax deductions:

    • 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.

    What you can't claim

    You can't claim the cost of the following as income tax deductions:

    • solicitor's fees for the purchase of the property (these are a capital expense)
    • solicitor's fees for the preparation of loan documents (these can be claimed as borrowing expenses)
    • legal costs associated with resisting land resumption (these are a capital expense)
    • 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).

    Next steps:

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

    Last modified: 26 Jul 2019QC 23635