Ali and Jonty hadn’t realised how complicated owning an investment property could be until chartered accountant GAIL FREEMAN put them right.

Jonty and his partner Ali have bought a rental property. They’d heard that the ATO was focusing this year on rental properties and came to see me for guidance. 

I told them they were right and that the ATO had recently published its list of areas of focus for 2024, which included rental properties. 

“Although you have just purchased the property, you may have some claims for repairs and maintenance,” I told them.

“This might seem simple, but I have to tell you that there are thousands of cases and rulings on the topic of repairs. In the case of a new property it is unlikely that there are many repairs, but if your property is in a dilapidated condition and you paid a low price, the ATO’s view is that you can’t claim the repairs until you sell the property, when they’ll come into the capital gains tax calculation.

“What people often think is a repair may not be for tax purposes. The cases make it clear that the item is an improvement. An improvement may be able to be written off over 40 years as a capital allowance or it carries forward and is offset against the capital gain when you sell. 

“It is really important that you keep all your records so that all calculations can be done accurately.”

I recommended that before they make any significant repairs, they should call my office and we can advise whether the item was likely to be deductible or depreciable or not claimed immediately.

Ali said she hadn’t realised repairs couldn’t be claimed. She was actually thinking of renovating the property so that it was more livable and may rent for a higher price.

I told he she could certainly renovate, but most of the items would be written off over 40 years under the capital allowance provisions. 

“Unless you buy new property you can’t depreciate things like the hot water service, stove and carpets,” I said.

“However, when you replace these items after your initial purchase, you can write them off over a period of time.

“You cannot claim mortgage repayments, you can only claim the interest paid. However, interest is always under the spotlight. For example, you have a drawdown facility on your loan and you need some cash and you draw down, say, $10,000. Two days later, you pay it back. 

“You would think that this will allow you to claim 100 per cent of the interest on the loan as a deduction. Not so; a calculation has to be done of the claimable percentage.”

Jonty said his bank had recommended they set up an offset account to reduce the interest on the mortgage. 

“That’s a great thing to do when it is your home and you get an advantage from the offset account because the interest is not deductible,” I said.

“However, with an investment property the interest is deductible so you don’t get the same advantage from an offset account as you do against your non-deductible home mortgage.

“If you decide to use the property at some point for private purposes, for example, a relative could live there and therefore the property is not earning assessable income, you cannot claim any deductions.”

Ali and Jonty looked at each other and said: “Gail, we hadn’t realised how complicated owning an investment property could be. Thanks for giving us some pointers; we’ll be back for you to do the tax returns in the new financial year.”

If you need any assistance with a rental property or any tax related matter contact the expert team at Gail Freeman & Co-on 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.