We all have at one point in time, heard about a great way to save on tax. At this time of year you are bound to hear a line ball call or two so it’s timely to debunk some of those tax myths, rumours and mistruths. In part 1 we debunked the Tax Myths, Rumours and mistruths for Individuals, this article we turn to the most common tax myths, rumours and mistruths when it comes to the taxation of rental properties:
- If you make a loss when you sell a rental property you can reduce the tax that you have to pay on your salary income. False, unfortunately any loss on the sale of investments is generally a capital loss and can only be used to reduce capital gains. They cannot be offset against ordinary income.
- If you have a property that you rent to a friend or relative and you only charge them a small amount of rent, you can still claim all of the costs for the property to offset this income. False, where a property is rented at less than market value to a related party you can only claim a proportion of the expenses. That proportion is equal to the actual rent charged to the market value of the rent.
- If you have a loan that is secured against an investment property then all of the interest on that loan is a tax deduction. False, to determine the tax deductibility of interest on a loan you need to ascertain the purpose for which the loan funds were borrowed. The ATO will trace loan funds drawn down to determine what the money is spent on and if the funds were not spent on the property or items relating to the property then the interest on that portion of the loan will not be deductible.
- If you have a holiday rental property it is ok to stay in the property at times during the year and it will not impact on the amount of expenses that can be claimed. False, where the owners of a property have private use of that property then the expenses must be apportioned based on the time used for private purposes to remove the portion of expenses relating to that private use. For example, if you were to stay in the property 1 month of the year then 1/12 of the expenses for that year will not be deductible.
- Any money spent on the physical property will be claimable as a repair. This is partly true, however it is very complicated. Generally any money spent on repairs and maintenance that bring the property back to its original condition/function can be claimed as a repair. Any spent to improve the property beyond its original condition/function will be an improvement and must be written off over the life of that improvement. There are also special rules that determine repairs as improvements where a property is purchased in a run-down condition and within a short period money is spent on repairs to that property to bring it into an acceptable condition.
We hope that this information helps dispel what’s fact from fiction when it comes to investment properties. Stay tuned for part 3 of Tax Myths, Rumours and Mistruths where we will cover common misconceptions relating to businesses.
Hanrick Curran has over 30 years of experience in providing accounting advice to individuals, property investors, professionals, SME’s and listed organisations. To discuss your personal circumstances and how the tax rules apply to you please contact your usual Hanrick Curran advisor or alternatively contact Robert Pitt on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.