Check the expenses you can't claim as a deduction for your rental property.
For information on residential rental property expenses you can claim, see Rental expenses to claim.
Borrowing expenses are expenses you directly incur in taking out a loan for the purchase of your rental property.
For a summary of borrowing expenses you can and can't claim in poster format see, Rental properties – Borrowing expenses (PDF, 167KB)This link will download a file.
For more detail on borrowing expenses you can claim see, Rental expenses you claim over several years.
You can't claim any of the following as borrowing expenses:
- the amount you borrow for the property
- loan balances for the property
- interest expenses (as these are claimed separately)
- repayments of principal against the loan balance
- stamp duty charged by your state or territory government on the transfer (purchase) of the property title (as this is a capital expense)
- legal expenses including solicitors' and conveyancers' fees for the purchase of the property (as this is a capital expense)
- stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (but 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 (as this is a private expense)
- borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to buy a car).
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: Calculating borrowing expenses over 5 years
On 3 July 2017, 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 fee required by the bank for the loan.
Peter also paid $12,000 in 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 $1,600, which is more than $100, he must claim them over 5 years from the date he took out his loan for the property. He works out his borrowing expense deduction as follows:
- For the first year, 2017–18, Peter performs the following steps
- Step 1: work out the number of days from 3 July 2017 to 30 June 2018 (363)
- Step 2: work out the number of days in the 5-year period from 3 July 2017 to 2 July 2022 (1,826)
- Step 3: divide the number of days in Step 1 by the number of days in Step 2 (363 ÷ 1,826 = 0.19879)
- Step 4: multiply Step 3 result by the total borrowing expenses of $1,600 (0.19879 × $1,600 = $318). He claims $318 as a deduction on his 2018 tax return.
- For the 2018–19 to 2021–22 income years, 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 income year (remembering any leap years)
- Step 3: works out the number of days remaining in the 5 years (this includes the number of days in the income 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 2021–22 income year, Peter has claimed deductions totalling $1,598 on his respective tax returns.
- In the final year, 2022–23, 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 2022 and 2 July 2022 (equals 2)
- Step 3: works out the number of days remaining in the 5 years (1,826 − 1,824 = 2)
- 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, Peter claims a deduction of $2 on his 2022–23 tax return.
Second-hand depreciating assets for residential rental properties are depreciating items previously used or installed ready for use by you or another entity. In most cases, they are things that were existing in either:
- a property when you purchased it
- your private residence that you later rent out.
Existing residential rental property purchase
You can't 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 7:30 pm (AEST) on 9 May 2017.
Example: Assets previously used
In August 2017, Donna purchased a 2-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 or the television because they were both previously used.End of example
Home turned into a residential rental property
If you turn your home into a residential rental property on or after 1 July 2017, you can't 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: Changing main residence as a residential property
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 effective life of the used depreciating assets in it.
Kendrick can claim a deduction for the decline in value of 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 second-hand depreciating assets if any of the following apply:
- You are carrying on a business of letting rental properties.
- You purchased your residential rental property or a second-hand depreciating asset for your residential rental property before 7:30 pm (AEST) on 9 May 2017.
- You used a depreciating asset that you acquired before 7:30 pm (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 an excluded entity.
- 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).
You can’t claim a deduction for:
- expenses not actually paid by you, such as water or electricity charges paid by your tenants
- acquisition and disposal costs, including the purchase cost, conveyancing and advertising costs (instead, these are usually included in the property's cost base, which would reduce any capital gains tax when you sell the property)
- GST credits for anything you purchase to lease the premises – GST doesn't apply to residential rental properties, however, when claiming the expense as a deduction, you claim the total amount you've paid (inclusive of GST, if applicable).