Expenses prior to Renting | Online Tax Experts

Rental expenses prior to your first tenant

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.

Don't be too disheartened.  Still retain all those costs as they will add to your cost base when you eventually sell the property.  Thta will reduce the amount of Capital Gains Tax you pay.

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.

Gotax expert Q&A, for quick answers to those common questions

Expenses prior to renting are costs incurred before a rental property is available for tenants, such as interest, council rates, and repairs.

Can I claim interest on a loan before my property is rented?

Yes, you can claim interest if the property is genuinely intended for rental and you’re making efforts to rent it out.

Are travel costs to inspect a property before purchase deductible?

No, travel costs to inspect a property before buying it are not deductible.

Can I claim costs for attending property investment seminars?

No, seminar costs are not deductible if they relate to finding or buying a property, only if they relate to managing an existing rental.

Is council rates paid before renting deductible?

Yes, council rates paid while the property is being prepared for rent can be deductible if the property is genuinely available for rent.

Can I claim repairs done before renting out the property?

No, repairs done before the property is available for rent are not deductible as repairs; they may be considered capital costs.

Are advertising costs before renting deductible?

Yes, advertising costs to find tenants before the property is rented are deductible.

Can I claim insurance premiums paid before renting?

Yes, insurance premiums paid while preparing the property for rent are deductible if the property is genuinely available for rent.

Are utility costs before renting deductible?

Yes, utility costs like electricity and water are deductible if incurred while the property is genuinely available for rent.

Can I claim loan establishment fees before renting?

Yes, loan establishment fees can be claimed over five years, even if incurred before the property is rented.

How long can I claim expenses before renting?

You can claim expenses for a reasonable period before renting, as long as the property is genuinely available for rent and not used privately.

What records do I need for pre-rental expenses?

You need to keep receipts, contracts, and evidence showing the property was intended for rental and efforts were made to find tenants.

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 and you should use gotax.com.au, the Online Tax experts. This online platform guides makes it dead easy to complete a rental schedule and comes with 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, the onlien tax experts, make this process easier and more efficient.