Unlocking the Secrets of Rental Property Taxes: A Guide for Savvy Landlords

Owning a rental property can be a fantastic way to earn some extra cash and build wealth over time. But, like anything involving money, there are tax rules to navigate. Knowing what's taxable and following some smart practices can help you keep more of your hard-earned money in your pocket.

What's Taxable When You Rent Out Property?

When you rent out a property, the money you make is usually taxable. Here's the lowdown:

1. Rent Payments:
The rent you collect from tenants is taxable. Keep track of every dollar that comes in.
2. Tenant-Paid Expenses:
If a tenant covers any of your costs, like water rates or repairs, it's considered income (which offsets the cost of something that you have paid for).

Deductions: Your New Best Friend:

Luckily, you can offset your rental income with deductions. Here are some expenses you can write off:

1. Mortgage Interest:
The interest on loans for buying or improving your property is deductible.
2. Rates, insurance, and repairs:
These are all deductible, so make sure you keep your invoices.
3. Improvements:
If you undertake a project to do up a property, talk to your accountant about how to get the best tax outcome. Some work may qualify as repairs (a tax claim), but some may be capital and of no help with tax (i.e. improvements and changes in the asset like adding a 4th bedroom or 2nd bathroom, for example). Provide the accountants with the whole story and lots of detail. If you withhold information, they may have to assume it is all capital (and there may be no tax claim).
4. Timing matters:
If you do repairs prior to the property being tenanted for the first time, you might not get a deduction, as you generally aren’t in the business of being a landlord until the tenancy starts. Same thing if you do work after the tenant moves out and before the sale; there might not be a deduction as you stopped being a landlord when the tenant moved out. Get the roof painted before the tenant leaves if you are planning to sell! Talk to your Chartered Accountant about how to get the best outcome here.
5. Depreciation:
You can deduct a portion of your property's value each year due to wear and tear. Engaging a professional like Valuit to break down the property into chattels (depreciation claim) vs building (no depreciation claim) can be worth it.
6. Professional Fees:
Fees for property managers, accountants, or legal advice are deductible.

Smart Tips for Managing Rental Property Taxes:

1. Keep good records:
Save all receipts, invoices, and bank statements related to your rental property.
2. Pay your home loan down first:
If you have a mortgage on your own home still it may be best to pay down the principal on that before you pay down your rental debt to get the best tax deduction on the rental debt.
3. Get to know depreciation:
Understand how depreciation works and make sure you're claiming it correctly. It can lower your taxable income.
4. Separate finances:
Use different bank accounts for your rental property to keep personal and business finances apart.
5. Team up with an accountant who knows rental properties like the back of their hand:
Good advice pays for itself many times over.
6. Plan for taxes:
Set aside money for taxes throughout the year to avoid any surprises when it's time to pay up.

A Strategy for Success:

Owning rental properties can be a great investment, but it comes with its own set of tax challenges. By knowing what's taxable and using deductions wisely, you can make the most of your investment. Remember, keeping good records and staying informed are key to being a successful landlord.

Written by:
Tom Beswick
Director
Ingham Mora Chartered Accountants

This blog was written as a feature article by Tom Beswick of Ingham More Chartered Accounts. It is not intended as financial advice. Always seek independent specialist advice. You can learn more about Ingham Mora here.