Whether you use a tax professional or file your tax return yourself, avoiding these frequent tax mistakes will save you time and money.
1. Getting initial repairs and capital improvements right
You can’t claim an immediate deduction for:
- Repairs to pre-purchased damage on the property. E.g. Window replacement and floorboard repair are examples. Capital works deductions may be allowed over multiple years. When you sell the property, these costs determine your capital gain or loss.
- Property improvements. E.g. You repair a roof when only half of it is broken or renovate a bathroom. You can claim 2.5% of these building expenditures for 40 years after completion.
- Items over $300 that are damaged outside the house. For instance, replacing the hot water system requires a declined value deduction over several years..
2. Claiming interest on your loan
You can deduct rental property loan interest andonly the rental property interest can be claimed. Personal usage of the loan, such as buying a boat or going on vacation, does not qualify for interest. This requires interest to be apportioned throughout the loan or any refinanced debts, regardless of whether you return your boat, vacation, or other personal expense. Please consider this before utilising your investment loan for personal needs.
3. Claiming borrowing expenses
If your borrowing expenses exceed $100, the deduction is divided over five years. If they cost $100 or less, you can claim the entire amount in the same tax year in which you incurred the expense.
Borrowing expenses:
- Include loan setup expenses, title search fees, and the cost of drafting and filing mortgage documents.
- Do not add the stamp duty charged by your state or territory government on the property title.
Remember to divide your borrowing expenses in the first year according to the number of days you own the property.
4. Claiming purchase costs
Property purchase fees are not deductible. These include conveyancing and stamp duty (for non-ACT properties). Capital gains tax is calculated using these charges if you sell your property.
5. Getting construction costs right
You can deduct capital works charges for expansions, alterations, and structural improvements. A capital works deduction of 2.5% of the construction cost is allowed for 40 years after completion.
Ask the former owner of your property for capital works deduction details so you can calculate your deduction. If you can’t receive the facts from the previous owner, a skilled professional can estimate construction costs based on a property visit.
6. Claiming body corporate fees and charges
Your body corporate administration fund payments are fully deductible in the year you incur them.
You can’t deduct monies raised by your body corporate for substantial capital improvements or repairs from a special purposes fund. After the work is done, you may be eligible to deduct your portion. If a specific contribution is made, the expense must be paid to the special purpose fund or general purpose sinking fund.
7. Apportioning expenses and income for co-owned properties
You must declare rental revenue and claim costs according to your legal ownership of a rental property with someone else to avoid making a tax mistake. As joint tenants, your legal stake is split equally, while tenants in common may have distinct ownership interests.
8. Apportioning deductions for private use of your property
Only claim deductions for periods directly related to earning assessable income and not personal residency. If you rent part of your property or simply part of the year, you must divide your expenses by the area and days rented. You can use the property privately if:
- rent to family or friends below market rates
- keep it vacant.
To claim a tax deduction for empty periods, you must establish a clear purpose to rent. And includes:
- promoting the home and setting the rent to match nearby properties to attract renters
- avoiding rental conditions that are unreasonable.
9. Keeping up to date records
You must show records of rental property revenue and expenses to deduct to avoid making a tax mistake.
Your rental property may be subject to capital gains tax, so keep records for five years after you sell it.
10. Getting your capital gains right when selling
When you sell your rental property, you may make a capital gain or a capital loss. Generally, this is the difference between:
- what it cost you to buy, own and improve the property (cost base)
- what you receive when you sell it.
Depreciation and capital works should not be included in your cost base because they have already been deducted from rental income. Capital works expense deductions after 7:30 pm on 13 May 1997 must be deducted from your cost base.
Capital gains should be included in income tax returns.
You can carry forward capital losses to deduct from capital gains later.
For more information about how tax applies to property investing and avoiding further tax mistakes, see:
So if you want to avoid making tax mistakes and need assistance with your tax planning needs, contact our office to discuss what is best for your needs. Please reach out to our office on 02 9188 1547 and you will get through to our Oran Park or Norwest/ Baulkham Hills location, alternatively you can fill out the contact form and an Adviser from our office will contact you.
The information in this website and the links has been prepared for general information purposes only by our office and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax, personal or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned on this website, consult a professional financial advisor to consider whether it is suitable and appropriate for you and your personal needs and circumstances.
