Think about this scenario. A luxury home with chic interiors sits vacant, bought by the owner as an investment property. They don’t want to risk damage by renting it out to long term tenants as they are counting on the property appreciating in value. They place an advertisement for a short-term rental with an agent, but set the rent above market rates and place unreasonable conditions on those who want to rent the property. It stays vacant but the owners claim large rental deductions for the property each year.
As a savvy property investor, you probably know that you can claim deductions for expenses relating to your investment property when it’s rented out. But what happens when your property isn’t rented out? You can only claim deductions if your property is genuinely available for rent. Here are some things to consider: Firstly, you need to advertise in a way that maximises exposure to potential tenants. Advertising in ways that limit exposure, such as by word of mouth, means your property may not be genuinely available for rent. Similarly, only placing an advertisement via a real estate agent or an online site may not be enough to demonstrate to the Australian Taxation Office (ATO) that a property is genuinely available.
Secondly, it’s important that your rental property is in a location and condition such that tenants will want to rent it. If your property is poorly cared for, or in a remote area, it is unlikely to be tenanted, and may not be classed as genuinely available for rent. Next, if you set unreasonable conditions or refuse to rent out your property to interested tenants without a good reason, this indicates that you may not have a genuine intention to earn income from the property. And finally, if you reduce the likelihood of your property being rented out by setting the rent above market rate, your property may not be considered genuinely available for rent. Likewise, if you, your family or friends stay for free, your property isn’t considered to be available for rent during that period.
So, what about the luxury home mentioned above? The owner would not be able to demonstrate that the property is genuinely available for rent, and as a result they have claimed deductions they are not entitled to. If you have an investment property, you might like to do a property health check to ensure you’re able to claim your property expenses this tax time. In addition to being sure your property is genuinely available for rent, here are tips from the ATO to ensure you get your tax return right, every year.
7 Tax-Smart Habits
1. Declare all income: Any income you receive when you rent out your property must be declared on your tax return. You also need to be able to show that the rental income was paid to you.
2. Keep proof of all expenses: Make sure you have accurate records of your expenses and evidence to show that your property is genuinely available for rent.
3. Track when you use your rental for private use: If you, your family or friends stay in your rental property for free or a reduced rate, this will affect the expenses you can claim for that period. You can only claim expenses up to the amount of rent you receive during this period.
4. Only claim interest expenses on the part of your loan that relates to your rental property: You can claim interest charged on a loan relating to your rental property. However if you use part of that loan for private purposes, such as to buy a new family car, you can’t claim interest on that part of the loan.
5. Get your improvement or initial repair claims right: Improvements such as renovating the bathroom must be claimed as capital works and spread over a number of years. Initial repairs for damage that existed when you purchased the property are not immediately deductable. Instead these costs are used to work out your profit when you sell the property.
6. Correctly divide income and expenses of co-owned properties: If you share ownership of your rental property with another person, you’ll need to divide the income and expenses according to your legal interest in the property.
7. Increase your knowledge: The ATO website contains a wide range of useful information, including an in depth guide to rental properties along with real-life case studies. Visit www.ato.gov.au/rental