When you buy an investment property, it’s assumed that all costs associated with the property will be a tax deduction, unfortunately, this is not always true.
An expense is deductible when it is incurred and to the extent that it relates to producing assessable income. Some of these expenses may include:
- Advertising for tenants
- Utilities & Taxes
- Loan Interest
- Agents’ Commissions
All of the above are common rental property expenses incurred in relation to rental income received.
Are they all tax deductible?
A common misconception is that all of the above-listed expenses will still be tax deductible during the period that a property is undergoing renovations after the purchase, even though it is not being leased. This is incorrect. If a property is not available for rent then there is no ability for the Super Fund to be receiving (producing) rental (assessable) income, and would also not be entitled to claim a deduction for any expenditures.
During the construction period up to the day the property is available for use, all expenditure incurred are to be capitalised. These costs are all directly related to the property’s capital improvement and not in relation to any rental (assessable) income being received (as no income is being received during this period). This would include any of the above-listed costs, and all renovation costs being capitalised during this period. Being capitalised essentially means that the costs are being added to the original cost of the property so that when the property is sold, the original purchase price is higher and theoretically any potential capital gain is lessened.
When you can claim costs
As soon as the property is available for use, regardless of whether it is leased straight away or not, all costs such as body corporate, rates, cleaning, minor repairs, commissions, and loan interest, etc., can be claimed as an expense to reduce rental (assessable) income.