Top 3 rental property deduction errors
The most common errors when it comes to rental deductions
Rental property deductions continue to be an area where many taxpayers make mistakes, leading to incorrect claims and the need for adjustments.
Understanding common deduction errors can support accurate reporting and reduce the risk of compliance issues.
Not apportioning interest expenses correctly
If you own a rental property, you can claim deductions for interest you pay on your loan to:
buy the rental property
buy a depreciating asset for the property (for example, 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.
You can’t claim the interest on any part of the loan used for personal expenses.
For example: if you refinance or redraw funds from your rental property loan for private expenses – such as school fees or a holiday – you cannot claim this portion of your interest as a deduction. You must apportion 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.
Here's a recap:
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
Errors also occur 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 you:
Only use part of the property to earn rent (for example, renting out a room in your 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 you co-own a property, you'll also need to apportion these expenses according to their legal percentage of ownership.
Where you use your rental as a holiday home you cannot claim ownership and use expenses, such as interest, rates and repairs unless they used or held it for use mainly for producing rental income.
Make sure you're claiming the right rental property deductions. Collins Hume's tax specialists can help you understand what you can claim, avoid common mistakes and manage your investment property tax obligations. For tailored advice, contact our team on 02 6686 3000.
