The Tax Office has identified common mistakes made by people declaring rental income and claiming deductions.
In their returns for the 2004 tax year almost 1.5 million taxpayers declared rental income with 250,000 of these claiming deductions for the first time.
Advice for first-timers
For tax purposes there are two categories of rental property expenses you can claim:
* expenses for which you can claim a deduction in the year they are incurred, such as council rates, insurance and loan interest, and
* expenses which are deductible over a number of years, such as borrowing costs, deductions for capital works and deductions for the decline in value of depreciating assets.
You cannot claim acquisition or disposal costs, although they may form part of the cost base of the property for capital gains tax purposes.
You also cannot claim as immediate deductions the costs to repair damage, defects or deterioration that existed when you first purchased the property. They are capital expenditure and should be claimed as capital works deductions over either 25 or 40 years depending on when they were carried out.
Renovation costs are also capital expenditure and should be claimed as capital works deductions over the relevant number of income years.
Common mistakes
There are some common mistakes made by both first-time and other rental property owners:
* Incorrectly claiming the cost of the land as a capital works deduction, that is, as part of the cost of constructing or renovating the rental property.
* Incorrectly claiming the cost of improvements such as remodelling bathrooms or kitchens or adding a deck or pergola as repairs. These are capital improvements and should be claimed as capital works deductions.
* Overstating claims for deductions on the interest on the loan taken out to purchase, renovate or maintain the property. A loan may be taken out for both income-producing and private purposes, such as to purchase motor vehicles or other goods or services. The interest on this private portion of the loan is not deductible and should not be claimed.
* Incorrectly claiming the full cost of an inspection visit when it is combined with another private purpose, such as a holiday. In such cases, you can only claim that portion of the travel costs that relate directly to the property inspection.
* Claiming deductions for properties which are not genuinely available for rent.
* Incorrectly claiming deductions when properties are only available for rent for part of the year. If a holiday home or unit is used by you, your friends or your relatives free of charge for part of the year, you are not entitled to a deduction for costs incurred during those periods.
* Claiming deductions for items incorrectly classified as depreciating assets. The ATO has have produced a comprehensive list of more than 230 residential property items identifying whether they are depreciating assets eligible for a decline in value deduction, or as assets eligible for a capital works deduction. This list is in the Rental properties booklet. Call us if you would like a copy if this booklet
* If you financed the purchase of your rental property using a split loan facility, you cannot claim a deduction for the extra capitalised interest expense imposed under that facility.
From the ATO