How to Make Tax Deductions on Your Rental Property - Part Two

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This month it involves all those things you spend money on but you cannot have the deductions for right now, you have to recover them over time. If you missed last months article on immediately deductable expenditures you can read it here.
This information comes with the usual disclaimer. It is meant to give you an insight into what you can claim but is not intended to cover your personal circumstances.
In all cases you should see your accountant or tax agent to ensure that you claim all you are entitled to and to avoid claiming things that you can’t. There is much misinformation out there so play it safe and seek advice.

Expenses not immediately deductible 

Capital works expenditure
Deductions for construction expenditure (capital works deductions) on residential rental properties are generally spread over a period of 40 years.
You can claim a deduction if construction began after:
  • 17 July 1985 and the property is used for residential accommodation or to produce income
  • 19 July 1982 and the property is not used for residential accommodation (for example, a shop), or
  • 21 August 1979, the property is used to provide short-term accommodation for travellers and it meets certain other criteria.
A deduction may also be available for structural improvements made to parts of the property other than the building if work began after 26 February 1992. Examples include sealed driveways, fences and retaining walls.
The deduction is at the rate of 2.5% or 4% (adjusted for part-year claims) depending on the date the capital works began. Your total capital works deductions can't exceed the construction expenditure. No deduction is available until construction is complete.
Deductions for construction expenditure apply to capital works such as:
  • How to Make Tax Deductions on Your Rental Property - Part Twoa building or an extension – for example, adding a room, garage, patio or pergola
  • alterations – such as removing or adding an internal wall
  • structural improvements – such as adding a gazebo, carport, sealed driveway, retaining wall or fence. 
You can only claim deductions for the period in which the property is rented or is available for rent.
 If you have claimed, or could have claimed, a capital works deduction for construction expenditure:
  • you can't claim the same amount as a deduction for decline in value of a depreciating asset, and
  • the amount must be excluded from the cost base of the asset.
Borrowing expenses
You can claim a deduction for borrowing expenses associated with purchasing your property, such as loan establishment fees, title search fees, and costs of preparing and filing mortgage documents. (Interest on the loan is not a borrowing expense, and can be claimed immediately.)
If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less.
If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.
What can you claim?
You can claim all of the following as borrowing expenses:
  • stamp duty charged on the mortgage
  • loan establishment fees
  • title search fees charged by your lender
  • costs (including solicitors' fees) for preparing and filing mortgage documents
  • mortgage broker fees
  • fees for a valuation required for loan approval
  • lender's mortgage insurance, which is insurance taken out by the lender and billed to you.
What are you unable to claim?
You cannot claim any of the following as borrowing expenses:
  • stamp duty charged by your state/territory government on the transfer (purchase) of the property title
  • legal expenses including solicitors' fees for the purchase of the property (these are capital expenses)
  • stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (you may be able to claim this as a lease document expense)
  • insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
  • borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to invest in a super fund).
Stamp duty and legal expenses may be included in calculating the 'cost base' of the property for capital gains tax (CGT) purposes as they are capital expenses.
If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment.
If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year you had the loan.

Depreciating assets
You can claim a deduction for the decline in value of certain items, known as depreciating assets, that you acquired as part of the purchase of your property or that you subsequently purchased for your property.
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Examples of depreciating assets are freestanding furniture, stoves, washing machines and television sets.
The decline in value of a depreciating asset starts when you first use it, or install it ready for use. This is known as the depreciating asset's start time. For example, if you purchased an asset on 1 January (and used it only for a taxable purpose), you can claim half of the first income year's decline in value.
Your deduction is reduced to the extent your use of the asset is for other than a taxable purpose.
For assets costing $300 or less, you can claim an immediate deduction for the entire cost (to the extent you use it for a taxable purpose). You can't do this if the asset is one of a set of assets that together cost more than $300 – for example, if you buy four dining chairs each costing $250, you can't treat them as separate assets to claim an immediate deduction.
To work out the decline in value of a depreciating asset, you need to know its effective life – that is, how many years you can use it for a taxable purpose. For most depreciating assets, you can work out the effective life yourself, or use an effective life determined by us.
To work out your deduction for depreciation, use either the:
  • prime cost method – this means the value of the depreciating asset decreases uniformly over its effective life, or
  • diminishing cost method – this means the decline in value each year is a constant proportion of the remaining value; so it diminishes over time.
To save on paperwork, depreciating assets valued at less than $1,000 can be grouped in a low- value asset pool and depreciated together.
Read Part 1 here.
There is also a lot of helpful information on the ATO website that will be of assistance.

  How to Make Tax Deductions on Your Rental Property - Part Two
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