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A Beginner's Guide To Rental Expenses

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If your property portfolio is about to expand, a savvy investor should understand the role of rental expenses and how they relate to your tax obligations.

Once you’ve managed to successfully purchase your first home, there usually comes a point where Aussies start looking at other avenues to increase their income. Suddenly, property becomes less of an obligation and pressure point, and begins to become an appealing option in terms of increasing the bottom line of your bank account every week. 

However, investing in property isn’t for everyone, and often boils down to your own individual circumstances. As it generally involves large sums of money, it’s important to do your research if you’re considering this avenue as a way to build wealth. The good news is that the more educated you are on how to use rental expenses as a way to offset the extra income from your investment home, the less tax you’ll pay in the long term - but what exactly can you claim?

The World Of Rental Expenses Explained

Before approaching tax claims related to rental expenses, property investors first need to understand if their property is positively or negatively geared. If the rental property in question is positively geared, what this means is that the income earned from renting the property is more than your expenses. In a nutshell, positive gearing is when investors make a profit from the rental property. 

In contrast, negative gearing is the term used when the expenses that a rental property incurs are higher than the actual income earned from it. However, this isn’t necessarily a bad thing though, as investors can then claim deductions directly linked to the expenses that the rental property incurred over the financial year against the income earned via the rent and other income such as business revenue, wages or your standard salary. 

As a general rule, there are three types of categories when navigating rental expenses - immediate claims, deductions claimed over several years, and purchases that are non claimable. Immediate claims are usually the most commonly associated with things many of us link to rental expenses, and can include the following:

  • Advertising for tenants

  • Bank charges

  • Body corporate fees

  • Cleaning requirements 

  • Council rates

  • Electricity or gas while the property is rented or available for rent

  • Gardening maintenance and lawn mowing

  • In-house audio/video service charges

  • Insurance policies such as building, contents and landlord

  • Interest on loans

  • Land and council tax

  • Legal expenses that are tenant related

  • Mortgage discharge expenses

  • Pest control

  • Property agent’s fees and commissions

  • Capital works (claimed at 2.5% of the cost per year)

  • Quantity surveyor’s fees

  • Repairs and maintenance

  • Secretarial and bookkeeping fees

  • Security patrol fees

  • Servicing costs such as smoke alarms

  • Stationery and postage

  • Telephone calls and rental

  • Tax agent fees

  • Water charges

  • Property related purchases less than $300

In comparison, landlords are also able to claim other deductions or depreciating assets spread across a number of years while the property is rented. Common examples of these include borrowing expenses like loan fees and lenders mortgage insurance, capital works such as improvements or repairs to the property, and even depreciating assets such as flooring materials, furniture, and appliances. 

However, these claims are all strictly monitored by the Australian Tax Office, so if you want to avoid attracting the wrong types of attention, it’s always a good idea to seek the help of a seasoned industry professional to assist you in managing your tax affairs relating to rental expenses. 

Property is a tangible asset, which means it can be seen, touched and occupied. The downside is that as a physical asset, there’s also the chance that the property will become worn, outdated or require ongoing maintenance. It’s also an investment strategy that’s not considered to be liquid - that is, property can’t easily or quickly be converted into cash. After all, if you suddenly need access to funds, it’s not like you can sell one bedroom at a time. Aside from the assistance an accountant or financial advisor can provide with tax benefits, they can also be invaluable if you’re an investor thinking long term - but where do you find one?

Navigating Tax Obligations With The Professionals 

Whether you’re looking to become a property tycoon, start a business, purchase an existing one, or even re-evaluate where your current enterprise stands, these all require some form of financial know-how if you hope to successfully navigate your legal tax requirements as well as hit your financial and business goals. 

However, if understanding the legalities that surround your business or finances isn’t your strong point, then it may be reassuring to know that you’re not alone. In fact, many individuals and businesses enlist the services of an accountant in order to free up their time, while knowing that their financial obligations are already taken care of by the professionals. 

Ultimately, the team at Muro believe that every business owner is an entrepreneur. However, accounting does not discriminate - finances break down barriers and are not territorial. If you would like to take a deeper look into your finances, please get in touch with us at Muro today to ensure that you’re on the right path for success.

Tania Muscillo