Claiming a tax deduction for rental property ownership expenses

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You can claim a tax deduction for some of the expenses associated with owning a rental property in the year in which you incurred them, but others must be claimed over time.

DEPRECIATING ASSETS

Items that will wear out and need to be replaced, such as carpets and appliances, need to be depreciated. This means you claim the cost of the item over its expected lifespan.

The Australian Taxation Office has published a list of the timeframes for depreciating common items found in rental properties.

For example, the ATO suggests carpet should be depreciated over 10 years and floating timber doors over 15 years. Gas or electric hot water systems can be depreciated over 12 years, while the suggested lifespan of solar hot water systems is 15 years. The ATO suggests cook tops, ovens and refrigerators should be depreciated over 12 years.

You can use the ATO’s suggested timeframes to claim depreciation or, in some cases, you can make your own estimates.

If you want to use your own estimate of the e ective life of a depreciating asset, you’ll need to be able to back up your claims with information such as the manufacturer’s specifications, engineering information or common practices for scrapping the item.

The item’s lifespan starts from when it was new, not when you started claiming deductions. If you install second-hand items, you’d have to consider their lifespan since new, not since you bought them.

CAPITAL WORKS

If your rental property was built after July 17, 1985, you may be able to claim a deduction for construction costs, known as a capital works deduction. 

Capital works deductions are usually claimed at a rate of 2.5 percent t a year for the 40 years after construction. They cover expenses for buildings, extensions such as garages or patios, alterations such as kitchen and bathroom renovations and structural improvements including carports, sealed driveways and fences.

Assets that are considered to be part of the building must also be depreciated as capital works.

This includes:

• Cabinets, sinks and xtures in kitchens and bathrooms

• Built-in wardrobes

• Tiles and other oor coverings that can’t easily be removed without damaging the building

• Insulation

• Fly screens and awnings

If you want to claim for capital works, you’ll need records of the construction dates and building costs, details of who carried out the works and the type of construction.

If you don’t have access to these details, you can hire a quantity surveyor, architect or builder to supply this information. 

To download a free ebook on new financial year taxation tips for property investors, click here.