Rental Property Deductions - some common mistakes encountered by the ATO

Last updated June 2011

According to the ATO some of the common mistakes it encounters when looking at the returns lodged by rental property owners include:

• claiming deductions for rental properties not genuinely available for rent;
• incorrectly claiming deductions for properties only available for rent for part of the year (for example a holiday home);
• incorrectly claiming the cost of structural improvements as repairs when they are capital works deductions (such as remodelling a bathroom or building a pergola); and
• overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property.

A loan can be taken out for both income producing and private purposes (for example, to buy a house and go on an overseas holiday). The interest on the private portion of the loan is not tax deductible.

There are two categories of rental property expenses taxpayers can claim:

• expenses for the year they paid them – such as council rates, repairs, insurance and loan interest; and
• expenses that are deductible over a number of years – such as borrowing costs, structural improvements and the cost of depreciating assets.

Taxpayers cannot claim costs associated with acquiring or disposing of a property (but they may form part of the cost base of the property for CGT purposes).

Renovation costs and costs to repair damage, defects or deterioration existing on purchase cannot be claimed as an immediate deduction. These costs are capital expenditure – depending upon what is repaired or improved – and must be claimed as either depreciation deductions over the asset’s effective life or as capital works deductions over 40 years.

Travel expenses

Another ‘trap’ to watch out for is travel expenses to inspect a rental property. If a taxpayer travels to inspect or maintain their property or collect the rent they may be able to claim the costs of travelling as a deduction. They are allowed a full deduction where the sole purpose of the trip relates to the rental property. However, in other circumstances they may not be able to claim a deduction or they may be entitled to only a partial deduction. The following examples are taken from the ATO’s Rental Properties booklet:

Example: Travel and vehicle expenses

Although their local rental property was managed by a property agent, Mr Hitchman decided to inspect the property three months after the tenants moved in. During the income year Mr Hitchman also made a number of visits to the property in order to carry out minor repairs. Mr Hitchman travelled 162 kilometres during the course of these visits. On the basis of a cents-per-kilometre rate of 69 cents for his 2.6 litre car Mr Hitchman can claim the following deduction:

Distance travelled	x	rate per km	=	Deductible amount
162 km	x	69 cents per km	=	$111.78

On his way to golf each Saturday, Mr Hitchman drove past the property to ‘keep an eye on things’. These motor vehicle expenses are not deductible as they are incidental to the private purpose of the journey.

Apportionment of travel expenses

Where travel related to your rental property is combined with a holiday or other private activities, you may need to apportion the expenses.

If you travel to inspect your rental property and combine this with a holiday, you need to take into account the reasons for your trip. If the main purpose of your trip is to have a holiday and the inspection of the property is incidental to that main purpose, you cannot claim a deduction for the cost of the travel [PP note: if the main purpose of the trip however, is to inspect the property and the holiday is a ‘side benefit’ the travel costs will be deductible].

However, you may be able to claim local expenses directly related to the property inspection and a proportion of accommodation expenses.

Example: Apportionment of travel expenses

The Hitchmans also owned another rental property in a resort town on the north coast of Queensland. They spent $1,000 on airfares and $1,500 on accommodation when they travelled from their home in Perth to the resort town, mainly for the purpose of holidaying, but also to inspect the property. They also spent $50 on taxi fares for the return trip from the hotel to the rental property. The Hitchmans spent one day on matters relating to the rental property and nine days swimming and sightseeing.

No deduction can be claimed for any part of the $1,000 airfares.
The Hitchmans can claim a deduction for the $50 taxi fare.
A deduction for 10% of the accommodation expenses (10% of $1,500 = $150) would be considered reasonable in the circumstances.
The total travel expenses the Hitchmans can claim are therefore $200 ($50 taxi fare plus $150 accommodation).
Accordingly, Mr and Mrs Hitchman can each claim a deduction of $100.

Further information can be found on the ATO's website