At the other end of the spectrum, there are the costs that are put towards maintenance of the rental property, which are also tax deductible. The ATO recognises things like painting, oiling, brushing, cleaning, and the upkeep of electricals and plumbing as being tax claimable.
An allowable expense is anything you have spent wholly and exclusively for the purposes of renting out your property. This broadly means any expenditure in relation to the property's up-keep.
Here are 10 of my favourite landlord tax saving tips:
- Claim for all your expenses.
- Splitting your rent.
- Void period expenses.
- Every landlord has a 'home office'.
- Finance costs.
- Carrying forward losses.
- Capital gains avoidance.
- Replacement Domestic Items Relief (RDIR) from April 2016.
Landlords enjoy a wide array of deductions they can claim for rental property. Most expenses related to renting a home – including appliance purchases, repairs and improvements – are deductible. Appliance purchases and improvements are capitalized and depreciated, while appliance repairs are expensed.
Rental ExpensesYou may only deduct expenses that are the result of letting out the property. There are special rules for some types of expenses – especially property repair costs. The sorts of expenses that you can deduct from the rent that you get are: cost of gas safety certificates or similar requirements.
Allowable expenses are essential business costs that are not taxable. Allowable expenses aren't considered part of a company's taxable profits. You therefore don't pay tax on these expenses. Most small businesses can claim allowable expenses, but there are a few exceptions.
The reduction is the basic rate value (currently 20%) of the lower of: finance costs - costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward.
Is rental income taxable? Yes, rental income is taxable, but that doesn't mean everything you collect from your tenants is taxable. You're allowed to reduce your rental income by subtracting expenses that you incur to get your property ready to rent, and then to maintain it as a rental.
If you make any repairs to damage that existed when you purchased the property, this is considered an initial repair and won't be an immediate deduction. You can claim initial repairs as Capital Works or Capital Allowances on the rental schedule.
You can claim a full tax deduction for all expenditure on repairs to your building that are incurred in an accounting period. This means that the expenditure does not qualify for a tax deduction against profits but may eventually get tax relief for capital gains tax as an 'improvement' to the property.
Buy-to-let landlords cannot usually reclaim VAT on their expenses. Whilst HMRC considers that renting out homes is a business for VAT purposes, it is an exempt one. This can be bad news for landlords because exempt businesses are prevented from reclaiming VAT paid on expenses.
After all, how could they know what you've earned in rental income unless you report it? The IRS can find out about unreported rental income through tax audits. At that point, the IRS will determine if you have any unreported rental income floating around. If that is the case, the IRS will demand payment.
You can use an unused rental loss deduction to offset future rental income. For example, if you had a $2,000 loss in 2019 and your rental property produces a $3,000 taxable gain in 2020, you can use the unclaimed 2019 loss to reduce it. Your income (MAGI) falls below the $150,000 threshold.
Without passive income, your rental losses become suspended losses you can't deduct until you have sufficient passive income in a future year or sell the property to an unrelated party. You may not be able to deduct such losses for years. In short, your rental losses will be useless without offsetting passive income.
Landlords are no longer able to deduct mortgage interest from rental income to reduce the tax they pay. You'll now receive a tax credit based on 20% of the interest element of your mortgage payments. This rule change could mean that you'll pay a lot more in tax than you might have done before.
Unless you actively engage in rental activities, the IRS considers rental real estate a passive activity. Therefore, if you have no other passive income, you cannot deduct your rental expenses without any rental income.
An Illustration
| Condition | Tax Exemption |
|---|
| 1 | Rs 60, 000 (@Rs 5000 Per Month, according to the HRA exemption 2016-17 rules, earlier the limit was Rs 2, 000) |
| 2 | Rent paid i.e. 1.5 Lakhs - 10% of the total annual income, i.e. Rs 40, 000= Rs 1, 10, 000 |
| 3 | 25% of the total income= Rs 1 Lakh |
