Not all expenses related to rental properties are tax-deductible. A common mistake many fall into is spending money on doing up a property, to make it rental ready, and expecting to get a tax deduction for the money spent. These are considered capital expenses and generally, you can’t claim a deduction for capital expenditure.
Peter Smith’s Rental Dilemma
Let’s consider the scenario of Peter Smith. Peter buys a property intending to rent it out. Before he rents it out, he decides to undertake $50,000 of repair work to make the rental more habitable and attractive to potential tenants.
Example 1: Repair Work
The $50,000 Peter spent on repair work is considered a capital expense as they are "initial repairs". This is because the work is done to bring the property up to a rentable standard. Also, at the point of the repairs you have not undertaken any income producing activities. The basis of taxation and deductions is to match the deductibility of expenses with the earning of income. Your property needs to be "available to rent" in order for tax deductions to be achieved. At this stage there are no steps to derive income. Therefore, this expense is not immediately deductible in the income year Peter incurred the expense. Depending on the nature of the improvements/repairs there "maybe" scope to apply the depreciation provisions.
Example 2: Ongoing Maintenance
Now, let’s say after a year of renting out the property, Peter spends $2,000 on repainting the interior walls due to normal wear and tear. This expense is considered a maintenance cost, not a capital expense, and is therefore tax-deductible in the same income year he incurred the expense.
Important Note: as in "Read me, I'm Important"
If you fall into the situation above, then there is some light at the end of the tunnel. Still retain all the receipts for all the work that has been undertaken, it will eventually have a use. Those expenses can be used to reduce your capital gains when you eventually sell the property. That could be many, many years into the future, so find a nice safe place for those records.
Recording Tax Transactions with Deduction Grabber
To keep track of these transactions, Peter could use the “Deduction Grabber” app. This tool allows him to record his tax-deductible expenses simply by taking a photo of his receipts.
Completing Your Tax Return with GoTax
When it’s time to complete his rental property tax return, Peter could use gotax.com.au. This online platform guides him through his job-specific tax deductions, ensuring nothing is missed. This makes the process of completing his tax return less daunting and more straightforward.
In conclusion, understanding the difference between capital expenses and maintenance costs can significantly impact your rental property tax return. Tools like Deduction Grabber and platforms like gotax.com.au make this process easier and more efficient.
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