There are three categories of rental expenses, those for which you:
- cannot claim deductions
- can claim an immediate deduction in the income year you incur the expense
- can claim deductions over a number of income years.
Apportionment of rental expenses
There may be situations where not all your expenses are deductible and you need to work out the deductible portion. To do this you subtract any non-deductible expenses from the total amount you have for each category of expense; what remains is your deductible expense.
You will need to apportion your expenses if any of the following apply to you:
- your property is available for rent for only part of the year
- only part of your property is used to earn rent
- you rent your property at non-commercial rates.
Expenses prior to property being available for rent
You can claim expenditure such as interest on loans, local council, water and sewage rates, land taxes and emergency services levy on land on which you have purchased to build a rental property or incurred during renovations to a property you intend to rent out. However, you cannot claim deductions from the time your intention changes, for example if you decide to use the property for private purposes.
Property available for part-year rental
If you use your property for both private and assessable income-producing purposes, you cannot claim a deduction for the portion of any expenditure that relates to your private use. Examples of properties you may use for both private and income-producing purposes are holiday homes and time-share units. In cases such as these you cannot claim a deduction for any expenditure incurred for those periods when the home or unit was used by you, your relatives or your friends for private purposes.
In some circumstances, it may be easy to decide which expenditure is private in nature. For example, council rates paid for a full year would need to be apportioned on a time basis according to private use and assessable income-producing use where a property is used for both purposes during the year.
In other circumstances, where you are not able to specifically identify the direct cost, your expenses will need to be apportioned on a reasonable basis.
Example 5: Apportionment of expenses where property is rented for part of the year
Mr Hitchman’s brother, Dave, owns a property in Tasmania. He rents out his property during the period 1 November 2012 to 30 March 2013, a total of 150 days. He lives alone in the house for the rest of the year. The council rates are $1,000 per year. He apportions the council rates on the basis of time rented.
Rental expense × portion of year = deductible amount
He can claim a deduction against his rental income of
$1,000 × (150 ÷ 365) = $411
If he had any other expenses, such as telephone expenses, these too may need to be apportioned on a reasonable basis. This may be different from the basis used in the above example.
End of exampleOnly part of your property is used to earn rent
If only part of your property is used to earn rent, you can claim only that part of the expenses that relates to the rental income. As a general guide, apportionment should be made on a floor-area basis, that is, by reference to the floor area of that part of the residence solely occupied by the tenant, together with a reasonable figure for tenant access to the general living areas, including garage and outdoor areas if applicable.
Example 6: Renting out part of a residential property
Michael’s private residence includes a self-contained flat. The floor area of the flat is one-third of the area of the residence.
Michael rented out the flat for six months in the year at $100 per week. During the rest of the year, his niece, Fiona, lived in the flat rent free.
The annual mortgage interest, building insurance, rates and taxes for the whole property amounted to $9,000. Using the floor-area basis for apportioning these expenses, one-third (that is $3,000) applies to the flat. However, as Michael used the flat to produce assessable income for only half of the year, he can claim a deduction for only $1,500 (half of $3,000).
Assuming there were no other expenses, Michael would calculate the net rent from his property as:
Gross rent |
$2,600 |
(26 weeks × $100) |
Less expenses |
$1,500 |
($3,000 × 50%) |
Net rent |
$1,100 |
|
End of example
For more information about the apportionment of expenses, see Taxation Ruling IT 2167 – Income tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases and Taxation Ruling TR 97/23 – Income tax: deductions for repairs.
Non-commercial rental
If you let a property, or part of a property, at less than normal commercial rates, this may limit the amount of deductions you can claim.
Example 7: Renting to a family member
Mr and Mrs Hitchman were charging their previous Queensland tenants the normal commercial rate of rent ($180 per week). They allowed their son, Tim, to live in the property at a nominal rent of $40 per week. Tim lived in the property for four weeks. When he moved out, the Hitchmans advertised for tenants.
Although Tim was paying rent to the Hitchmans, the arrangement was not based on normal commercial rates. As a result, the Hitchmans cannot claim a deduction for the total rental property expenses for the period Tim was living in the property. Generally, a deduction can be claimed for rental property expenses up to the amount of rental income received from this type of non-commercial arrangement.
Assuming that during the four weeks of Tim’s residence the Hitchmans incurred rental expenses of more than $160, these deductions would be limited to $160 in total ($40 multiplied by 4 weeks).
If Tim had been living in the house rent free, the Hitchmans would not have been able to claim any deductions for the time he was living in the property.
End of exampleFor more information about non-commercial rental arrangements, see Taxation Ruling IT 2167.
Prepaid expenses
If you prepay a rental property expense, such as insurance or interest on money borrowed, that covers a period of 12 months or less and the period ends on or before 30 June 2014, you can claim an immediate deduction. A prepayment that does not meet these criteria and is $1,000 or more may have to be spread over two or more years. This is also the case if you carry on your rental activity as a small business entity and have not chosen to deduct certain prepaid business expenses immediately.
For more information, see Deductions for prepaid expenses.