Tightening the Belt on Rental Property Deductions

Recent legislative changes have now restricted the ability to claim certain rental property expenses. 

There are two main items where tax deductibility have been significantly reduced impacting on most investment property owners.

Read on as we explore and explain the changes in relation to claiming Travel Deductions and Depreciation for your investment property.

Travel Deductions:

Homeowners will no longer be able to claim deductions for travel they incur in connection with their residential rental property, unless they are carrying on a business of property investing or are an excluded entity.

In the business of property investing

Generally, owning one or several rental properties is not considered to be running a business of rental properties.

The receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business.

What’s an excluded entity?

An excluded entity is a:

  • corporate tax entity
  • superannuation plan that is not a self-managed superannuation fund
  • public unit trust
  • managed investment trust
  • unit trust or a partnership, all of the members of which are entities of a type listed above.

However, taxpayers may still claim travel expenses to inspect commercial premises.

Property management expenses paid to real estate agents (which may involve real estate agents incurring travel expenses to inspect the residential rental property) are still deductible.

Depreciation:

From 1 July 2017, the depreciation on plant and equipment (e.g. washing machines and refrigerators) in residential rental properties will be limited depending on whether:

  • the plant and equipment was acquired before or after 9 May 2017;
  • the plant and equipment have been previously used;
  • the plant and equipment have been used in the taxpayer's residence before; or
  • whether the plant and equipment is installed in new residential premises.

Taxpayers who owned a rental property, or entered into a contract to purchase their rental property before 7.30pm on 9 May 2017, can continue to claim depreciation deductions for assets that were in the rental property before that date. It does not matter whether the depreciating asset installed in the property was new or used, or whether the property was new or not.

However, if a rental property was purchased at or after 7.30pm on 9 May 2017, taxpayers cannot claim deductions for second-hand or used depreciating assets, whether they are bought with the property or separately. They also cannot claim depreciation deductions if they have used the asset for private purposes before installing it in the rental property.

Where a taxpayer buys a newly built property, or buys a property that has been substantially renovated, they will be entitled to claim depreciation deductions for new depreciating assets if:

  • no one previously claimed any depreciation deductions on the asset; and
  • either no one lived in the property when the taxpayer acquired it; or
  • if anyone lived in the property after it was built or renovated, the taxpayer acquired it within 6 months of the property being built or renovated.

If you are wondering how the changes specifically affect your situation, please do not hesitate to contact one of our team and they will be able to assist further.