Owning rental property can be a lucrative investment, but when it comes to tax time, many property owners make avoidable mistakes that can cost them money or lead to complications with the Australian Taxation Office (ATO). To ensure you’re on top of your tax obligations and getting the most out of your rental property, here are some key tips to help you avoid common mistakes.
1. Keep Detailed and Organised Records
One of the most important tips is to maintain thorough and organised records of all your rental property-related income and expenses throughout the year. This includes receipts for repairs, invoices for property management fees, rental income details, and utility bills. Keeping detailed records ensures that you can back up your claims come tax time and prevents errors in your reporting. Also, using software or apps to track your income and expenses can make this task easier.
2. Claim Depreciation Deductions
Many rental property owners miss out on valuable depreciation deductions. Depreciation allows you to claim the decline in value of the building (if it was constructed after 1985) and the assets inside it, such as appliances and furniture. To make sure you claim the maximum depreciation deduction, consider hiring a qualified quantity surveyor to prepare a depreciation schedule. This document can provide a breakdown of eligible depreciation for your property, helping you save thousands in tax.
3. Correctly Apportion Personal and Rental Use
If you occasionally use your rental property for personal purposes—whether for holidays or as a second home—you must ensure you correctly apportion expenses between personal and rental use. You can only claim deductions for the period the property is rented out or available for rent. If you used the property is used for personal reasons, like as a holiday home, you can only claim expenses for the time it was used for income-producing purposes. Be sure to keep track of the dates the property is rented versus used privately to avoid over-claiming.
4. Ensure the Property is ‘Genuinely Available’ for Rent
Additionally, another important tip is to ensure that your property is genuinely available for rent. The ATO requires that a property must be available for rent in order for you to claim deductions on it. If you’re not actively advertising the property for rent, or if you are restricting potential tenants (for example, by setting unreasonable rental prices or terms), the ATO may not consider the property ‘genuinely available’ for rent, and you could lose out on some deductions. Ensure that the property is properly listed, marketed, and available to prospective tenants, even if it’s between tenants.
5. Don’t Overlook Any Claimable Expenses
A common mistake is not claiming all of the expenses you’re entitled to. As a rental property owner, you’re eligible to claim a wide variety of expenses, such as property management fees, maintenance and repairs, council rates, insurance, and even legal fees. Keeping track of these expenses throughout the year ensures that you don’t miss out on any potential deductions. If you’re unsure about what you can claim, seek advice from a tax professional to ensure you’re maximising your tax return.
6. Understand Capital Gains Tax (CGT) Implications
When you sell your rental property, you may be subject to Capital Gains Tax (CGT). However, many property owners fail to plan for this tax. If the property was once your primary residence and you’ve since rented it out, you may be eligible for partial CGT exemptions under certain conditions. To avoid a nasty surprise when selling, it’s important to understand the CGT rules and plan accordingly. A tax professional can help you calculate your potential CGT liability and explore strategies to minimise it.
7. Regularly Review Your Tax Situation
Tax laws can change from year to year, and new opportunities for deductions may arise. Regularly reviewing your tax situation and consulting with your accountant can help you stay on top of any changes. By doing this throughout the year rather than just at tax time, you can ensure you’re always in the best position to optimise your tax return and avoid surprises.
Conclusion
To avoid making mistakes with your rental property taxes, it’s essential to stay organised, keep detailed records, and ensure you’re claiming all eligible deductions. Don’t hesitate to reach out to one of our experienced accountants—taking these proactive steps will help you navigate tax time with confidence and avoid common pitfalls.
