09 Nov ATO highlights common rental property deduction errors

The ATO has recently published the three most common rental property deduction errors it sees.

Not apportioning interest expenses correctly

Broadly, rental property owners can only claim deductions for interest they pay on a loan used to:

• buy the rental property;
• buy a depreciating asset for the property (e.g., an air conditioner);
• pay for deductible expenses (e.g., repairs) that arise from renting out the property; or
• finance renovations and extensions to the rental property.

Interest on any part of the loan used for private purposes is not deductible.  

Where the loan is refinanced or redrawn to pay private expenses, such as school fees or a holiday, a deduction cannot be claimed for the interest on that portion.

Incorrect claims of repairs vs capital works

The ATO continues to see errors in claims for repairs, maintenance and capital works expenses.  

Generally speaking:

• repairs, such as fixing wear and tear, or damage to a property that occurred while renting it out, can be claimed as a deduction in the year they occur;
• improvements, such as renovating or replacing an entire structure, are capital expenses which can be claimed over time (generally 40 years); and
• adding or replacing something that’s not part of the structure (e.g., a new appliance) is a depreciating asset and the cost is generally claimed over the asset’s effective life.

Separating private use of a property (and apportioning deductions)

The ATO is also seeing rental expenses not being apportioned for any private use.  

Generally speaking, if a rental property owner:

• only uses part of the property to earn rent (e.g., renting out a room in their home) — they must apportion the expenses based on the area of the property rented;
• rents out the entire property, but for only part of the year — they must apportion the expenses based on the number of days it was rented or held to produce rental income; or
• charges below market rates of rent, and the expenses incurred are more than the amount of rent received — the ATO expects them to apportion the expenses by limiting them to the amount of rent derived from the property (so there is no net rental income or loss).

Where the rental property owner uses the property as a holiday home, they cannot claim ownership and use expenses, such as interest, rates and repairs, unless they ‘used or held it for use mainly for producing rental income’.