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If you own a rental property, it is important to understand what expenses are deductible to help lower your tax burden.

Deductible expenses

Generally, for an expense to be deductible, it needs to be incurred in generating the rental income while the property is either rented out or has been made available for rent.

These expenses include ongoing and holding costs:

• Rates
• Insurance
• Cleaning
• Accounting fees
• Property management fees
• Travel expenses eg, inspection
• Legal costs (under $10,000) in purchasing the rental property
• Mortgage interest (subject to interest restriction rules)
• Low value assets under $1,000
• Repairs and maintenance of revenue in nature
• Depreciation on chattels

Non-deductible expenses

Expenses that are of capital nature are not tax deductible.  These expenses are:

• Purchase price of the property
• Principal portion of loan repayments
• Any additions and improvements to the property 
• Repairs and maintenance that go beyond replacement including repairs work completed before/after the tenant moving in/out
• Depreciation on the building
• Agent commission as part of buying and selling the property

Interest deductibility

From 1 October 2021, interest is not deductible for a rental property purchased on or after 27 March 2021, but an exemption applies for “new builds”. Mortgage interest deductions for a property acquired before this date are being phased out by the government. Only 75% of the interest can be claimed from 1 October 2021 to 31 March 2022. The percentage will decrease in 2024 and 2025 with no interest deduction being allowed from 1 April 2025 onwards.

More about interest limitation rules

Repairs and maintenance

Not all repairs and maintenance costs you incur are deductible. Whether you can make a deduction or not will depend on the nature and extent of work done. If the work undertaken goes beyond restoring the property to its original condition or increases the value of the property, the costs are capital expenses so not deductible for tax purposes.

More about business repairs and maintenance 

More about repairs for flood-damage

Depreciation on chattels

For chattels to be depreciable, they must not form part of or attach to the building eg, oven, dishwasher, heat pump and carpets etc.

If your rental property has high value chattels, we recommend that you engage a professional valuer to identify the value of these items for depreciation purposes.

However, if your rental property has outdated chattels, it may not be worth doing this exercise.

Ringfencing

Under the new ringfencing rules, if your rental expenses are higher than your rental income, the losses can no longer be offset against your other income such as salary and wages. Landlords are required to carry forward rental losses to offset future rental profit.

The rules apply regardless of ownership structure eg, company, trust or individual.

More about ringfencing of rental losses

What to do?

A Xero non-GST cashbook can offer what you need when it comes to managing the financials for your rental properties. It is an online system where you can connect your bank statements to the file via bank feeds so you can reconcile the bank transactions and track your income and expenses. We can help set you up on Xero and provide all the necessary training required.

It’s also essential to know the tax rules in order to avoid common taxation pitfalls.  Our team keeps up to date on the latest legislation. Please get in touch with us if you want any further tax advice.