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Landlords are entitled to claim tax deductions for certain expenses in relation to rental properties. The following are the most common deductions for landlords deriving rental income from tenanted properties:

  • council rates, water rates and land tax;
  • building, fire, burglary, public liability, loss of profits, insurance premiums;
  • interest on money borrowed to acquire or renovate the income-producing property. If a property acquired for income-producing purposes ceases to be used for income-producing purposes, the interest ceases to be deductible. If a property originally acquired as a domestic residence is subsequently let to tenants, interest paid during the period it is tenanted is deductible. If the property and mortgage are in different names, in general it is the property owner who is entitled to the deductions;
  • borrowing expenses, including guarantee fees, search fees, valuation fees, survey and registration fees, etc (pro-rated over prescribed periods);
  • management fees paid to real estate agents for managing tenanted properties and commissions paid for the collection of assessable rental income;
  • the cost of advertising for tenants;
  • the cost of non-capital repairs and regular maintenance costs;
  • furniture and furnishings owned by the landlord if the property is let furnished. For example, carpets, blinds, hot water service and light fittings are depreciating assets and a deduction is available for the decline in value (though an outright deduction may be available depending on the cost). The cost of a quantity surveyor’s depreciation report would be deductible;
  • expenses of discharging a mortgage, lease preparation costs etc, provided they are not reimbursed by the tenant;
  • travel costs to inspect the property, repairs etc;
  • bank charges on accounts specifically maintained to receive rental income or provide for maintenance disbursements;
  • specific telephone call charges in dealing with estate agents, tenants, plumbers etc;
  • building write-off deductions – but subject to restrictions; and
  • head rental payable by the landlord if they are a lessee rather than the owner and is sub-leasing the property to another rent-paying tenant.

Body corporate fees and charges paid to an administration fund or a general purpose sinking fund to cover the cost of day-to-day administration and general maintenance and repair of common property are generally deductible. However, a special contribution levied by the body corporate for particular capital expenditure is not deductible.

Outgoings in respect of an empty rental property will only be deductible if the property is available for rent and there are active and bona fide attempts to let the property. This means that outgoings will not be deductible for any period during which the landlord does not actively seek to find a tenant (for example, by listing the property with a real estate agent, advertising the property in newspapers and/or online and erecting “for lease” signs). Similarly, if a rental property (a holiday home, for example) is occupied by its owner from time to time, allowable deductions will have to be apportioned. Whether the apportionment is based solely on the actual number of days the property is let at a commercial rent, or whether the number of days the property is available for letting at a commercial rent are also taken into account, depends on the particular circumstances.

If the tenant is a boarder in the taxpayer’s house rather than the tenant of a separate property, a proportion of costs (heating, lighting etc) paid by the landlord may be deductible. An acceptable basis of apportionment is the floor area or number of rooms occupied by the tenant in relation to the total area of the house or number of rooms. If the tenant pays for room and board, the costs of the tenant’s meals are deductible.

Expenses may not be deductible if the particular arrangement is on non-commercial terms (for instance, if the landlord lets the property to a family member for little or no rent). Under certain circumstances careful consideration will need to be given to whether the property was rented on commercial terms. Note that if a co-owner of a rental property lives in the property, the other co-owner may claim a deduction for their share of the relevant expenses against the rental income received from the one who lives in the property (provided the arrangement is a commercial one).

The points above are general comments only in relation to specific items. Whether an expense item is or is not deductible under the tax law will depend on the situation. If you have a question concerning your specific circumstances, please contact our office.

Taxman’s focus on rental property deductions

The ATO is maintaining its compliance focus on rental property deductions. Key focus areas include the following:

  • excessive deductions being claimed for holiday homes. Deductions can only be claimed for the period the property is rented out, or is genuinely available for rent, and should be limited to the amount of income earned when the property is rented to family or friends below market rates;
  • husbands and wives inappropriately splitting rental income and deductions for jointly owned properties; and
  • interest deductions being claimed for the private proportion of loans taken out to purchase, renovate or maintain a rental property.