Rental Properties

RENTAL PROPERTIES CHECKLIST

These are simply some of the major items which need to be considered when purchasing rental properties. Our team of highly trained tax accountants have extensive experience to help you tailor the correct claims and strategy for your individual situation.

The questions are subject to fairly strict guidelines and you simply can’t afford to “wing it “and hope for the best. The cost of an incorrect guess could be more than you think.

The following topics give you information to ask FORSYTHS the right questions.

  • Travel and other expenses (such as agents’ fees or the cost of newspapers) incurred during the process of searching for a suitable rental property to purchase, are normally not deductible and do not form part of the cost base of the property for CGT purposes.
  • Where a rental property is purchased as a long-term rental investment, the cost is normally not deductible, but it may form part of the cost base for CGT purposes. Any gain arising on the eventual sale will normally not be assessable as income, but CGT may apply, assuming that the property was not pre-CGT.
  • If the purpose of purchasing a rental property is to make a one-off speculative profit on buying and selling the property within a relatively short time-frame, any gain on that sale will be assessable and any loss deductible. Although the CGT provisions will also apply, any assessable capital gain would be reduced by the income amount otherwise included in the taxpayer’s assessable income.
  • Interest on funds borrowed to purchase a rental property is normally deductible. If the taxpayer constructs a new rental property, a deduction may be available for interest incurred during the construction of the property.
  • If the taxpayer constructs a new rental property, it may be treated as a separate CGT asset from the land if the land is pre-CGT or a balancing adjustment applies. If the taxpayer makes a capital improvement to a pre-CGT building, the building and the improvement may be treated as separate assets if the improvement is “substantial”.
  • If the taxpayer constructs a new rental property, certain costs will qualify for capital allowance at an annual rate of 2.5%. FORSYTHS will guide you to a qualified quantity surveyor who will provide a low cost, tax deductible report which usually results in substantial additional claims. This is the preferred ATO option and more readily acceptable in a rental audit.
  • Stamp duty on the transfer of a property forms part of the property’s CGT cost base.
  • The initial expenses associated with borrowing money to purchase a rental property (including stamp duty) may be written off over a period of years.
  • A deduction is available for the expense of discharging a mortgage over a property that has been used solely for the purpose of earning assessable income.
  • If a rental property is owned by an individual taxpayer and has at some stage also been used as the taxpayer’s “main residence”, the taxpayer may be entitled to a partial CGT exemption.

  • The mere receipt of a bond by a taxpayer does not constitute assessable income. However, to the extent the bond is actually retained in lieu of unpaid rent, the amount retained may be assessable income. Bond moneys retained to pay for deductible repairs may be offset against the deduction. Amounts received from the lessee for non-compliance with a lease obligation to repair business premises are assessable.
  • Rental income is assessable to the lessor.
  • The ownership of an investment property does not of itself constitute a business and, therefore, a taxpayer will only be assessable on rent that is actually received in the year of income.
  • If a taxpayer’s entitlement to retain prepaid rental amounts is irrevocable, the prepayment is assessable in the year of receipt. If the entitlement to retain the prepayment is conditional, it may be that the prepayment can be apportioned.
  • A genuine lease premium is a capital receipt, and not assessable as income.

  • Interest on funds borrowed to purchase a rental property is normally deductible. If the taxpayer constructs a new rental property, a deduction may be available for interest incurred during the construction of the property.
  • A taxpayer may claim a deduction for interest on money borrowed to purchase items for a rental property, such as furniture and to pay expenses associated with repairing, maintaining or upgrading a property.
  • In appropriate circumstances, negative gearing can provide significant tax benefits. A taxpayer may also be able to apply for reduced levels of PAYG installments to reflect the reduction in taxable income resulting from the accruing rental loss.
  • Expenses incurred by a taxpayer for the purpose of deriving assessable rental income are normally deductible. These include documentation and legal expenses, advertising, agents’ fees, administrative expenses, rent collection, inspection costs, insurance, council and water rates, land tax and strata body corporate contributions.
  • A deduction is available for expenses incurred on repairs to a property and depreciating assets associated with the property. The deduction does not apply if the repairs are of a capital nature e.g. Where they make the property or asset functionally superior to its previous condition or where the damage was present at the time the property was purchased.
  • Amounts paid by the lessee for non-compliance with a lease obligation to repair business premises are deductible (and assessable to the lessor).
  • When a property is not held solely for the purpose of earning assessable income, a taxpayer must apportion expenses between the income-producing activities and other activities.

  • If the taxpayer constructs a new rental property, certain costs will qualify for capital allowance at an annual rate of 2.5%.
  • A taxpayer can claim a deduction for the decline in value (formerly “depreciation”) of furniture and fittings in the rental property.
  • A “balancing adjustment” may be required when the taxpayer stops holding a depreciating asset. The adjustment is generally based on the difference between the value of the asset when the taxpayer stops holding it and its adjustable value.
  • The temporary investment allowance (“business tax break”) generally did not apply to the purchase of depreciating assets for a rental property, as this does not normally constitute the carrying on of a business.

  • When a rental property is held by two or more people jointly, each partner accounts for their share of the net partnership income or loss according to their ownership interests in the property. If the rental property forms part of a wider business activity carried on in partnership, then the net income or loss from the property may be distributed in accordance with the terms of the partnership agreement.
  • Special tax considerations may apply where a rental property is held by a company, a family trust or a unit trust.

Smart Investment choices in a downturn market Value Traps Investments

Top 10 Tips For Choosing The Best Location Tax Depreciation Calculator