By Alisa Sainoski

Rental properties.  Long considered a wonderful tax-saving plan and contribution towards retirement.  However, in times of falling property markets, increasing rental vacancy rates and tighter restrictions on borrowing, are they really worth the effort?

In the first instance, when deciding whether to purchase or make an existing home into an income-generating asset, consideration needs to be given with regards to whether the obligation of being a landlord is something which can be coped with.

Secondly, whether the property is to be negatively or positively geared needs to be considered as this will drive not only the type of property which is purchased, but the type of tenant, loan and area of purchase.

Negative gearing occurs when the deductible expenses associated with acquiring and holding an income-producing investment exceed the income earned from the investment, with the resulting net loss being offset against other assessable income of the taxpayer.  Investors may significantly reduce their tax bill with a negatively geared investment (a definite tax advantage).  The downside to a negatively geared investment is the gamble.  That is, the gamble in the long run, for the value of the investment to increase to such a degree as to offset the annual negative results received during the period of ownership.

Conversely, positive gearing occurs when the income generated from the investment exceeds it’s cost thus in most cases, creating a tax bill when the tax return is prepared.  These types of investments add to a taxpayer’s income each month (rather than costing money) and as such, in the long run are generally speaking, far more preferable.

Other benefits in relation to owning a rental property include potential increase in capital growth and the ability to demonstrate a broad asset base.  Unfortunately however, there are disadvantages to owning a rental property.  These include things such as unpaid rent, damage to the property and in the worst cases, criminal activity being undertaken at the property.

Rental Deductions

So you’ve decided to go ahead and take the plunge into rental property ownership.  What costs can be offset against the income of the property and how will that be reflected in your tax return?

Broadly, rental expenses incurred by a taxpayer for the purpose of earning assessable rental income will be deductible, provided they are not private or capital in nature.  In the event very little income (if any) has been received in relation to a rental property, an “intention to derive assessable income” needs to be demonstrated in order to claim the expense.  For example, a taxpayer may build a house which will be rented out once completed, the cost of the interest paid during construction would be deductible in this instance.  Expenses which are not incurred solely for the purpose of deriving assessable income from a rental property will be subject to apportionment.

The most common types of expenses in relation to a rental property are listed here, this list is not exhaustive however:

From 1 July 2017, travel expenditure incurred in relation to inspecting, maintaining or collecting rent for a residential rental property by investors are not deductible.  In addition, depreciation deductions in relation to plant and equipment were broadly disallowed.  Such deductions are now limited to those which have actually been incurred by the owner and have not previously been used privately (for example when owner occupied houses are converted to rental properties).

Apportionment

Rental deductions need to be apportioned based on the period of time in which the property was available for rent during an income year (as opposed to the period of time in which the property was actually rented).

Where a property is sub-let, the apportionment will vary based on the item.  For example, where a deduction is available for depreciation, it may be apportioned on the basis of “identifiable use” which is limited only to those items of furniture provided in the room.

In relation to jointly used facilities, such as the fridges, carpets in common areas or washing machines, the basis of apportionment may be based on square meterage, or perhaps the number of tenants.

Conclusion

Much as with any investment, rental property ownership can be a gamble, but for the right property, in the right area with the right tenants, it could prove to be a valuable investment.

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