Rental Property Claims

Avoiding Common Mistakes

The ATO has recently provided a summary that outlines some common mistakes made in claiming rental property borrowing expenses. Ensuring that these mistakes are avoided when claiming deductions is important because it could also help to reduce the chances of being selected for an audit or review.

WHAT ARE BORROWING EXPENSES?

Borrowing expenses are incurred when a loan is taken out. These expenses include:

Stamp duty charged on the mortgage
Loan establishment fees
Title search fees charged by the lender
Cost of preparing and filing mortgage documents
Mortgage broker fees
Fees for a valuation required for loan approval, and
Lenders mortgage insurance (taken out by the lender and billed to the borrower).

COMMON BORROWING EXPENSE MISTAKES

There are several common mistakes made when claiming borrowing expenses:

Claiming a deduction for stamp duty on property title transfer

Stamp duty on the transfer of the title of the property is not a borrowing expense. It may however, be included in determining the cost base for capital gains tax (CGT) purposes.

Borrowing expenses claimed in full in the year incurred

Borrowing expenses that exceed $100 need to 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.

Claiming a deduction for borrowing expenses in full where a loan used to purchase a rental property is also partly used for private purposes.

Some taxpayers have taken out a loan to purchase 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. Some taxpayers have dangerously formed the view that holding property is one of the last ways that the ATO allows individuals to enjoy some tax "perks". This is simply untrue and to adopt such a view places taxpayers in a precarious position.

OTHER RENTAL PROPERTY CLAIM ERRORS

The ATO has maintained an active review program focusing on taxpayers who derive income from rental properties. A number of mistakes are routinely made by property owners that need to be prevented to avoid being made the subject of closer scrutiny. These mistakes include:

Overstating interest on loans taken out to purchase or renovate investment properties where part of the loan has been used for private purposes.
Claiming the cost of improvements as a repair instead of a claim for capital works.
Claiming full year deductions for a property that has been used for free by family or friends for part of the year.
Claiming full cost of inspection when that visit is combined with a holiday.
Redrawing on an existing loan created for income producing purposes and using all or part of the proceeds for private purposes, claiming the interest deduction for the full amount.
Claiming deductions for properties that are not used for income producing purposes, such as a holiday house.

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