Rental property deductions continue to be an area where many taxpayers make mistakes, leading to incorrect claims and the need for adjustments. Helping your clients understand common deduction errors can support accurate reporting and reduce the risk of compliance issues.
Not apportioning interest expenses correctly
Your clients who own a rental property can claim deductions for interest they pay on their loan, to:
- buy the rental property
- buy a depreciating asset for the property (for example, an air conditioner)
- pay for deductible expenses, such as repairs, that arise due to renting out the property
- finance renovations and extensions to the rental property.
They can’t claim the interest on any part of the loan used for personal expenses.
For example: if your client refinances or redraws funds from their rental property loan for private expenses – such as school fees or a holiday – they can’t claim this portion of their interest as a deduction. They must apportion their interest expenses to only claim the portion related to the rental property expenses. This must be adhered to for the life of the loan. If the loan is refinanced, the apportionment must continue with any future lending too.
Incorrect claims of repairs vs capital works
We see a lot of errors in claims for repairs, maintenance and capital works expenses. It’s important that rental property owners understand the difference in the expenses they can claim immediately, versus those they can only claim over a number of years. Remind your clients that:
- Fixing wear and tear, or damage to a property that occurred while renting it out – is a repair. Repairs can be claimed as a deduction in the year they occur.
- Renovating or replacing an entire structure – is an improvement. These are capital expenses, which can be claimed over time (generally 40 years).
- Adding or replacing something that’s not part of the structure (for example, a new appliance) – is a depreciating asset. These are claimed over the asset’s effective life.
Separating private use of a property
We also see errors where property owners aren't apportioning their expenses for any private use. This includes renting the property to family or friends below market rates, or keeping it vacant for their own use.
If they:
- Only use part of the property to earn rent (for example, renting out a room in their home) – apportion the expenses based on the area of the property rented (area-based method).
- Rent out the entire property, but for only part of the year – apportion the expenses based on the number of days it was rented or held to produce rental income (time-based method).
- Charge below market rates of rent, and the expenses incurred are more than the amount of rent received – apportion the expenses by limiting them to the amount of rent derived from the property so there is no net rental income or loss.
In certain circumstances, expenses must be apportioned using the area-based and time-based methods, for example, if part of the property is rented out for part of the income year.
If your client co-owns a property, they'll also need to apportion these expenses according to their legal percentage of ownership.
Where your client uses their rental as a holiday home they can’t claim ownership and use expenses, such as interest, rates and repairs unless they used or held it for use mainly for producing rental income.