This Landlord/Rental PropertyTaxation Guide
will help you, as an owner of a rental property in Australia, to determine the following:
Which rental income is assessable for tax purposes.
Which expenses are tax deductible.
Which records you need to keep.
What you need to know when you sell your property.
NEGATIVE GEARING EXPLAINED
If you have equity in an existing property, cash to invest or you're looking to enter the property market for the first time, you've probably heard of negative gearing.Negative gearing is a tax treatment that applies to the income people make from rental properties.
With the correct financial advice, and the right property, negative gearing can be a positive investment decision. Read on to find out more about negative gearing.
A rental property is negatively geared if you have to borrow money to buy it and the rental income, after deducting all the other property expenses, does not cover the interest on the mortgage.
WHAT IS NEGATIVE GEARING?
An investment property is negatively geared when the costs of owning it - interest on the loan, bank charges, agent fees, maintenance, repairs and capital depreciation - exceed the income it produces (rent).
Negative gearing offers immediate tax benefits coupled with the longer term prospect of an increase in investment value. For these reasons it's a more common choice for property speculators and/or those with hefty tax obligations.
Your investment must make a loss before you can claim a tax benefit. This not only works for property, but also shares, bonds and other investments.
This net loss can be used as a deduction against other income earned, for example a salary, before tax is paid on it.
THE BENEFITS & RISKS OF NEGATIVE GEARING
Effective negative gearing relies on the value of the investment increasing over time. Real Estate Institute of Australia research shows that over the past 20 years house prices have increased on an annual average basis by 8.3 per cent.
Like all investment strategies, investors must consider the inherent risk associated with borrowing money for an investment. The borrowers should consider their capacity to repay the shortfall and continue servicing the investment loan should it cease to make a return if the tenants leave or for other unforeseen circumstances.
Rental and other rental related income
is the full amount of rent & associated payments that you receive, or become entitled to, when you rent out your property - whether it is paid to you or your real estate agent. You must include your share of the full amount of rent you earn in your tax return.
RENTAL RELATED INCOME
Any rent collected from leasing your rental property and including any Air B & B rents must be declared in your taxation return .
If you received:
An amount received from the tenant to cover the cost of repairing the property is income, but the cost of the repair will be claimed as a deduction.
A government rebate for purchasing a depreciating asset, such as a Split Cooling/Heating System, will need to be declared as income.
CO-OWNERSHIP OF RENTAL PROPERTY
The way rental income and expenses are divid-ed between co-owners depends on whether the co-owners are joint tenants, or tenants in common, or operating a partnership, or carrying on a rental property business.
Co-owners must divide the income & expenses in line with their legal interest in the property
Joint tenants - hold an equal share in the property.
Tenants in Common - may hold unequal interest in a property - for example one may hold 20% interest and the other may hold 80% interest.
Rental income & expenses must be allocated to each owner in accordance with the legal ownership. This can not be changed by any other agreement between the owners either verbally or in writing.
TAX DEDUCTABLE EXPENSES
Investment property owners can claim deduction and depreciation against income on the property. There are three main classes of deductions available to investors:
You can claim a deduction for certain expenses you incur for the period your property is rented or available for rent. However, you can not claim expenses of a capital nature or a private nature - although you may be able to claim decline in value (depreciation) for certain capital ex-penditure.
TYPES OF RENTAL EXPENSES
There are three categories of rental expenses:
Cannot claim a deduction
Can claim an immediate deduction
Can claim over a number of years
Some expenses may need to be apportioned, each of these are discussed in more detail below.
Apportionment of Rental Expenses
There may be situations where you need to apportion the expenses:
Your property is available for rent for only part of the year.
Only part of your property is used to earn rental income.
You rent your property at non commercial rates.
Property available for part year rental
If you use the property for both private and income producing purposes, you can not claim a deduction for the portion which relates to private use. An example might be a holiday home. You can not claim a deduction for the time the property was used by you, your relatives or your friends for private purposes. In this case expenses like Council Rates would be apportioned on a time basis to calculate the private non deductible amount.
Expenses you can claim- Immediately
Rental Property Expenses you can claim immediately include the following:
Advertising for tenants Bank charges Body corporate fees
Cleaning Council rates Electricity & Gas
Gardening & lawn mowing In house video charges
Insurance Interest on loans Land tax
Lease document expenses Legal expense (conditional)
Mortgage discharge fees Pest control
Property agents fees Quantity surveyors fees
Repairs & maintenance Secretarial & bookkeeping services
Security patrol services Stationery & postage
Telephone calls Travel & car expenses(No longer claimable)
Expenses you can NOT claim
Expenses which are not able to be claim as a deduction include:
Acquisition & disposal costs.
Expenses not incurred by you, such as water paid direct by your tenant
Expenses which are not related to the rental property.
Acquisition & disposal costs
You can NOT claim a deduction for the costs of acquiring or disposing of your rental property. Examples of these costs are Conveyancing costs, legal fees on purchase or sale, stamp duty on the transfer of property, advertising expenses, com-mission on the sale. However all these costs form part of the calculation for Capital Gains Tax.
AN EXAMPLE OF NEGATIVE GEARING
An example negative gearing scenario is shown in the table below.
Example of negative gearing- monthly basis
Rental Income: $ 2,000.00
Interest, maintenance, etc. - $ 2,500.00
Council rates & other expenses - $ 240.00
Building allowances (depreciation) - $ 150.00
Total shortfall: - $ 890.00 x 12 months = $10,680 on a yearly basis
This example demonstrates how an investment asset may be negatively geared. The net loss of $890.00 per month ($10,680.00 per annum) may be claimed as a tax deduction against your wages & salary Income making your potentail ATO refund much larger.
FIND OUT MORE
To find out more about negative gearing and your loan options for an investment property, ring our hotline on 1800 654 591 and chat to a specialist.
Negative Gearing Statistics Australia:
"Two thirds of those who use negative gearing have a taxable income of $80,000 or less. Seventy per cent own just one property, and 70 per cent have a net rental loss of less than $10,000". These are the vast majority of Australians who use negative gearing are on a modest income?
An estimated $5.49 Billion is claimed by taxpayers in negative gearing in Australia.
The main employment catergories who avail themselves of negative gearing are:
Most negative gearers are modest income-earning Australians and two thirds of those who use negative gearing have a taxable income of $80,000 or less.