As a rental property owner, you need to be careful when lodging taxes. Whether you use a tax accountant or file a tax return on your own, make sure to avoid the most common tax mistakes. If you hire an accountant, then you don’t need to worry about anything related to taxes. Despite this, you can also search for a ‘tax accountant near me’ to hire an accountant near your area.
10 Tips to Avoid Common Tax Mistakes for Rental Property Owners
1. Apportion Income and Expenses for Co-Owned Properties
If you have a rental property in partnership with someone else, you need to declare rental expenses and as per your legal property ownership, claim expenses. As joint tenants, your legal interest will be split equally and as tenants in common, you could have different ownership interests.
2. Ensure Your Property is Genuinely Available for Rent
Your property needs to be available for rent, so you can claim a tax deduction. It means:
- you need to show a clear purpose to rent the property
- promoting the property so that someone can rent it and set the rent to correspond to similar properties in the area
- don’t put unreasonable conditions.
3. Getting Capital Improvements and Initial Repairs Right
Ongoing repairs related to damage that occurred as a result of renting out the property, then they can be claimed in the same income year you incurred the expenses in full. Initial repairs for damage when the property was bought are not deductible immediately but a deduction can be claimed over several years as a capital works deduction.
4. Claiming Borrowing Expenses
The deduction is spread over 5 years if your borrowing expenses are above $100. You can claim the full amount if borrowing expenses are $100 or less and can claim in the same income year you incurred the expenses. Borrowing expenses include title search fees, loan establishment fees, and costs of preparing and lodging loan documents.
5. Claiming Purchase Costs
You are not allowed to claim any deductions for the expenses of purchasing your property. These include stamp duty and conveyancing fees. If you sell your property, these expenses are used when you work out whether you need to pay CGT.
6. Claiming Interest on Your Loan
If you borrow money to buy your rental property, you will be able to deduct the interest from your taxes. You can’t deduct the interest paid on a portion of the loan if you use it for personal use like travelling or buying a boat. You can claim only the portion of the interest related to the rental property.
7. Getting Construction Costs Right
You can deduct specific building costs like extensions and improvements as capital works deductions. Typically, 2.5% is a deduction of the construction cost for 40 years from completion. If the property was previously owned by someone else who claimed deductions, ask for details or seek professional help to estimate previous construction costs.
8. Claiming the Right Part of Your Expenses
You may be able to only deduct for that time the rent you actually received if you rent out your rental property to relatives or friends at less than market value. When your family or friends stay for free or at times when you use the space for personal uses, you won’t be able to claim deductions.
9. Maintaining the Records
In order to make all of your rightful claims, you need to have proof of your income and spending. CGT may apply when you sell your rental property. Therefore, you need to keep records for as long as you possess the property and for five years beyond the date you sell it.
Getting Your Capital Gains Right When You Sell
You will make either a capital gain or loss when you sell your rental property. This is typically the gap between the price you paid to buy the property and make improvements to your property and the amount you actually get when you sell it. Your expenses, such as depreciation and capital improvements, can’t be deducted from the rental income produced by the property. You need to report any capital gains in your tax return for that income year if you do so. If you have a capital loss, you can carry it forwards and subtract it from future capital gains.