Understanding Which Expenses on Your Rental Property are not deductible

It is possible to claim a deduction for specific expenses incurred during the period in which your property is rented out or legitimately available for rent. It’s crucial to note that expenses of a capital or private nature are not claimable. However, you may claim declines in value deductions or capital works deductions for specific capital expenditure. You can also include certain capital costs in the cost base of the property for CGT purposes.

Understanding how to categorize your rental expenses is essential. There are three distinct categories:

• Expenses for which it is not possible to take deductions.

• Expenses eligible for an immediate deduction in the income year when they are incurred.

• Expenses for which deductions can be claimed over multiple income years.

  
  

Verify Contractor's ABN

Before hiring a contractor for your rental property, verify if they possess an Australian Business Number (ABN). If no ABN is provided, you may need to withhold 47% of the payment and remit it to the ATO.

Failure to withhold payments from a contractor who has not provided an ABN may affect your eligibility to claim a deduction for those expenses.

For further details, refer to other articles on the elimination of tax deductibility for non-compliant payments.

Rental Property Expenses That Are Not Eligible for Deduction

Non-Deductible Expenses

Some expenses cannot be deducted. These include:

• Costs involved in acquiring and disposing of the property.

• Charges that are not your responsibility, such as water or electricity usage incurred by tenants.

• Expenses related to situations where your property was not genuinely available for rent, including your holiday home.

• Non-rental expenses such as personal use costs for a vacation home rented part-time.

• Costs for maintaining a non-income producing property used as collateral for an investment loan.

• Expenses for maintaining unoccupied land.

• Costs incurred for purchasing specific used assets that have depreciated.

  
  

Non-Deductible Expenditures

Certain expenditures do not qualify for deductions, such as:

• Costs for conducting an inspection of a property prior to purchase or traveling for this purpose.

• Expenses incurred when transferring assets between rental properties.

• Costs for attending rental seminars aimed at identifying investment opportunities.

  
  

Expenses Related to Travel

Understanding Travel Deductions

Deductions for travel expenses related to residential rental properties apply only to individuals using the property for business purposes, such as leasing rental properties. Travel expenses encompass costs related to property inspections, maintenance, or rent collection, including meals and accommodations.

If your travel expenses also relate to other income-generating activities, you must allocate these expenses accordingly. For more details, refer to the document titled "Apportionment of Travel Expenses."

Depreciating Assets

Decline in Value Deductions

Deductions for the decline in value of specific second-hand depreciating assets against your residential rental property income are not permitted unless you use the property for business purposes. This includes letting rental properties or being an excluded entity. For more information, refer to the Limit on Deductions for Decline in Value of Second-hand Depreciating Assets.

Costs Associated with Acquiring and Disposing of Assets

Non-Claimable Costs

Deductions for expenses related to acquiring or disposing of rental property are not allowed. These expenses include:

• The acquisition cost of the real estate property, including charges associated with bank guarantees for deposits.

• Conveyancing costs.

• Advertising expenses or fees for a buyer’s agent engaged to find a rental property, including free property manager recommendations.

• Stamp duty on property transfers (excluding leases).

  
  

These costs can, however, form part of the property’s cost base for CGT purposes.

Deductions Related to Vacant Land

Understanding Vacant Land Deductions

Deductions for expenses related to holding vacant land have been restricted since 1 July 2019. Vacant land is defined based on specific criteria at the time the expense is incurred.

This property is considered vacant if:

• It lacks a significant and enduring structure.

• It possesses a significant structure classified as residential premises but is uninhabitable.

• It is not leased or offered for lease.

  
  

Conditions for Deductible Holding Costs

You can deduct the holding costs of vacant land if:

• The property is owned by an "excluded entity." This includes corporate tax entities, superannuation funds (excluding self-managed funds), managed investment trusts, public unit trusts, or partnerships solely consisting of these entities.

• The land is used for conducting business by you, your affiliate, or an affiliated entity, including family members.

• A significant and permanent structure was present on the land, but extraordinary circumstances caused the land to become vacant if you or an associated entity is also engaged in a primary production business and leased or rented the land to another entity.