The ATO continuously find common mistakes made in claiming rental property borrowing expenses.
It is important for rental property owners to ensure these mistakes are avoided in the future to reduce the possibility of being selected for an audit or review.
Property investors can claim certain deductions in their tax return when taking out a new loan to purchase an investment property. These costs include:
- Stamp duty charged on the registration of a mortgage
- Title search fees charged by the lender
- Loan establishment fees
- Lenders mortgage insurance (taken out by the lender and billed to the borrower)
- Mortgage broker fees
- Fees for a valuation required for loan approval
- Costs for preparing and filing mortgage documents
There are several common mistakes investors make when claiming borrowing expenses:
Claiming stamp duty deduction
Stamp duty charged by the state government on the transfer of the property title is not considered a borrowing cost. However, it may be included in determining the cost base of the property for capital gains tax (CGT) purposes.
Claiming borrowing expenses in full
Borrowing expenses that exceed $100 must be spread over five years or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, they may be fully deductible in the income year they are incurred.It is only when an investor repays the loan in less than five years, they are able to claim a deduction for the balance of the borrowing expenses in the year of repayment.
Claiming deductions for private purposes
Some taxpayers have taken out a loan to purchase or renovate a rental property and have used part of the proceeds for a private purpose, such as purchasing a vehicle. In these circumstances, borrowing expenses can only be claimed against the part of the loan that relates to the rental property and not the portion used for other private purposes.
Additional property claim errors
Other common mistakes routinely made by property owners that need to be prevented include:
- Claiming initial repairs and capital improvements as immediate deductions rather than a claim for capital works deductions.
- Claiming deductions for any expenses related to friends and family using the property for free during the year.
- Claiming the cost of travel to inspect the property when the main purpose of the trip is to have a holiday.
- Claiming deductions for a property that is not available for rent.