Last year Australian tax payers declared total rental income of $15.2 billion yet claimed rental deductions of $17.8 billion dollars. This is probably one of the reasons why the Australian Taxation Office has made no secret of its plans to get tough on shady deductions relating to investment property.

 

What I find really interesting is that while declared rental income for all taxable property investors increased by 12% over the previous years, tax deductions claimed by these investors against their rental properties increased by 19.5%.

 

With the Tax Office looking at these sorts of figures more carefully, I suggest if you are one of Australia's 1.4 million property investors you better make sure that you can legitimately claim what you are deducting. 

 

I am no tax expert, so please get the advice from your accountant or a quantity surveyor for your depreciation allowance.

 

Don't just assume that because you spent money on your rental property it is deductible in the year that you incurred the expense.

 

Some expenses clearly can be deducted in the year in which they occur.  Things such as council rates, insurance and interest on your mortgage.  But there are other expenses that are only deductible over a number of years such as borrowing costs and depreciation on the declining value of your property or its fittings.

 

One area which seems to cause a lot of confusion is deducting the costs of renovations on your investment property. Many investors buy an established property and do it up to increase their equity and increase their rent. They need help to claim these initial renovation costs as repairs and maintenance against their taxable income.

 

But this is not the case.

 

The Tax Office sees the costs of improvements and remodeling to kitchens and bathrooms as capital improvements and they must be claimed over a 40 year period like other capital expenditure.

 

Repairs are different to capital works.  They are about restoring your property to its original condition and with property it is original from when you bought it.  So if you bought property recently and doing it up it is not repairing it, you are actually improving it and this is a capital cost.

 

Once again I suggest you get an accountant's advice for your specific circumstances or engage a quantity surveyor to undertake a depreciation report for your property.

  

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