Rental income, after deduction of allowable expenses, is subject to income tax at the investor’s marginal tax rate.

The following deductions can be made in regards to investment property if it is rented out and used to gain assessable income:

  • Property management expenses
  • Repairs and maintenance expenses (but not improvements or replacing an asset in its entirety)
  • Rates, insurance and land tax
  • Interest on borrowings
  • Bank charges on accounts maintained to receive rental income
  • Travelling expenses incurred in visiting the real estate.

The above costs are not deductible if the property is not rented out to produce assessable income. However, they can be included as part of the ‘cost of the investment property’, which can result in a smaller capital gain if the investment property is later sold.

If the deductible costs exceed the rental income derived, such costs should as a general rule be allowable as deductions against other income.  A deduction cannot be claimed for the purchase of a capital asset for over $300, for example, furniture, television, window curtains and light fittings. However, such items can be subject to depreciation allowances that can be used to reduce taxable income over the effective life of the asset. Some assets, such as land, are not depreciating assets.

There is also a ‘capital works deduction’ that may be used in relation to rental property. It is necessary that the construction occurred or commenced after 17 July 1985 if the house is rented out for residential purposes. The building write off, also known as a Division 43 Allowance, is based on the construction costs of the building/house rented out. There is an annual 2.5 percent of the original construction cost deduction, depending on the date of commencement of construction and the type of structure.

 

Activity

  • What is the amount of tax an investor will pay if they earn $10,000 per year, after deductions have been taken into account, on a rental property and $40,000 salary income?

You will need to access the current rate payable for taxable income. (Tax rates vary per income year.)

 

Activity

In the past 12 months, Sophie Emanuel has incurred the following expenses on the investment property she has rented out:

1.      Repainting the exterior of the house
2.      Replacing the kitchen stove
3.      Replacing the hot water service
4.      Payments to a real estate agency for property management
5.      A new automatic roller door on the garage, which previously did not have a door and
6.      Installation of security locks on all windows.

  • Which of the above can Sophie claim as a deduction against her rental income from the property?
  • What happens if the expenses exceed rental income?
  • Can the deductions be claimed against other income?