Part 2 - Rental property deductions: what can I claim?

Camphin Boston | September 2019

Are you paying off a loan for an investment property you’ve purchased? The ATO says over-claimed interest is a common error made in rental property expense claims. Find out when you can deduct your interest payments and other associated loan costs, and stay on top of the rules this tax time.

Investment property owners should heed the ATO’s warning that it will target mistakes with rental property deductions this tax time. In our last instalment on rental deductions, we looked at the rules for purchase costs, repairs and improvements. Now, we consider expenses associated with a loan to buy the property.

Interest expenses

The general rule is that you can deduct interest expenses on a loan you’ve taken out to buy the property to the extent the property is used for generating rental income. You can generally deduct these interest expenses in the year you incur them.

You can also deduct interest expenses on loans to fund repairs and renovations, or to purchase depreciating assets (eg an air conditioner).

But beware: traps arise when you start mixing private uses with income-producing uses. This occurs if:

  • you use the property for private purposes – even to a small extent – in addition to renting it out; and/or
  • you use part of the loan for private purposes (eg to buy a car or pay for personal living expenses). This includes where you’re ahead on your loan repayments and redraw available amounts to fund private expenses.

In these cases, you’ll only be able to claim a portion of your interest expenses. You’ll need to keep records to substantiate what portion is private and what portion is rental property-related.

When you make a loan repayment, the ATO considers it to be apportioned across both private and rental purposes. (That is, you can’t “cherry-pick” by earmarking some repayments as related to the “private” part of the loan and others as “rental”-related.)

It’s important your claim stacks up because the ATO says over-claimed interest is on its hit list of common mistakes it’s watching for this tax time. The ATO is also concerned about holiday rentals that aren’t genuinely available for rent, and properties that are leased out at “mates’ rates” to friends and family.

Borrowing expenses

Are you claiming the full range of loan costs you’re entitled to? You can deduct costs like loan establishment fees, mortgage brokerage fees and costs of other necessary services that are directly related to taking out the loan for the rental property (such as title searches and property valuations required by the lender).

In some cases, you’ll need to carefully distinguish between costs of taking out the loan, and costs of buying the property:

  • Legal services of preparing and lodging mortgage documents are deductible as loan costs, but conveyancing fees for purchasing the property are not.
  • Similarly, any stamp duty on a registered mortgage is deductible, but stamp duty on the purchase of the property is not.

While you can’t claim any premiums for insurance you take out to pay out the loan in the event of your death, disablement or unemployment, you can deduct any lender’s mortgage insurance that is billed to you by the lender.

Watch out for special timing issues. Unless your total deductible loan costs are below $100, you’ll need to claim these costs over five years (or the term of the loan, whichever is the shorter period). And as with interest expenses, you can only deduct a portion of your loan costs if the loan will also be used partly for private purposes. Your tax agent can help you calculate the exact amount to deduct each year.

We’ll help you get it right

Whether you’re planning finance for a new investment property or already paying off an existing loan, talk to us for expert assistance in planning tax-effective rental property investments and getting your annual deductions right.

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