Claiming your rental property deductions With more people earning income from property investments than ever before, the Tax Office will again scrutinise rental property deductions when people lodge their 2003-04 income tax returns. To help you meet the tax obligations associated with your rental property investment, the Tax Office offers some important advice. If you have a rental property, you can claim a deduction for certain expenses you incur for the period your property is rented or available for rent. There are three categories of rental expenses: • expenses you can't claim; • expenses for which you can claim an immediate deduction in the year you incur the expense; and • expenses which are deductible over a number of income years. Some of the common mistakes that occur in claims for rental property deductions include: • Claiming the cost of carrying out initial repairs – such as rectifying damage, defects or deterioration that existed at the time of purchasing the property - as immediate deductions. These costs are capital expenditure and may be claimed as capital works deductions over either 25 or 40 years, depending on when they were carried out. Claiming construction costs, which are eligible for capital works deductions, as decline in value deductions (previously known as depreciation). Claiming renovation costs as deductions for repairs - again, these are expenses of a capital nature and may be claimed as capital works deductions. The Tax Office is investigating claims for repairs which are really capital improvements, such as remodelling bathrooms and kitchens and adding a deck or pergola. Including the cost of the land in capital works deductions (ie as part of the cost of constructing the rental property). Overstating interest deductions by including amounts related to private borrowings – interest on a loan taken out for both income-producing and private purposes, such as the purchase of a rental property and a private motor vehicle, needs to be apportioned into deductible and non-deductible parts according to the amounts borrowed for the rental property and for the private purpose. Not apportioning travel costs where a visit to inspect the rental property is combined with another purpose, such as a holiday. • • • • • • Claiming deductions for a property that is not genuinely available for rental or not apportioning deductions where the property is rented for only part of the year. Another issue that causes confusion is how to identify a depreciating asset. To address this the Tax Office has produced a list of over 230 items found in residential rental properties and identified them as either depreciating assets and eligible for a decline in value deduction, or as assets eligible for a capital works deduction. Depreciating assets commonly found in residential rental properties include: • • • • • • • • • • • • • air conditioning units (excluding ducts, pipes and vents); removable floor coverings; window curtains and blinds; dishwashers; electronic security assets; freestanding furniture; heaters; hot water systems (including solar hot water heaters); refrigerators and freezers; stoves, cook tops and range hoods; swimming pool filtration and cleaning systems; television sets; and washing machines. The full list can be found in the Tax Office’s Rental properties 2003-04 booklet. You can download a copy from www.ato.gov.au or call the Tax Office on 1300 720 092 and have a copy sent to you.