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Borrowing Expenses on Rental Properties: How much to deduct and when?
Rental Income
Rental and other rental-related income is the full amount of rent and associated payments that you receive/become entitled to against renting out your property. It can be paid either directly to you or to your agent managing your property.
Your tax return must include your share of the full amount of rent you earn which may also include other payments that you receive when renting out part or all your home through the sharing economy or the renting of your holiday home.
Not always the rent may be received in the form of cash/bank; sometimes it may be received in the form of Goods and services. If this is the case, you must report their monetary value as your rental income in your tax return.
Borrowing Expenses:
Borrowing expenses are one of the deductible expenses from your rental income. These are expenses directly incurred in taking out a loan for the Rental Property which GENERATES RENTAL INCOME.
What’s Included (√):
1) Loan establishment & Mortgage broker fees.
2) Title search fees charged by your lender.
3) Costs for preparing and filing mortgage documents.
4) Stamp duty charged on the mortgage.
5) Fees for a valuation required for loan approval.
6) Lender’s mortgage insurance billed to the borrower.
What’s Excluded (X):
1) Insurance policy premiums.
2) Interest expenses.
3) Stamp duty paid on transfer of the property.
4) Stamp duty incurred to acquire a leasehold interest in property.
How to claim a deduction of borrowing expenses?
Sum up all eligible borrowing expenses items as listed above and following case to apply:
| Case 1: | Total borrowing expenses ≤ $100 | Deduct in the same year as incurred. |
| Case 2: | Total borrowing expenses > $100 | Spread over 5 years OR the loan term (whichever is less). |
| Case 3: | Loan fully repaid within < 5 years | Deduct remaining amount in the year of full loan repayment. |
| Case 4: | Loan was approved part way through the income year | Only deduct apportioned amount for the days the loan was active for the year. (e.g. If loan was approved on 1 Jan 20XX, only 50% is deductible among the first year deductible amount) |
Calculating Borrowing Expenses Deduction for the year:
Total Borrowing expenses × (number of relevant days in year ÷ number of days in the 5-year period) × (amount of rental property loan ÷ total amount borrowed)
To find out more on how it can be tailored to your personal circumstances, please schedule an appointment with one of our experienced tax accountants / tax agents/ tax advisors Perth by calling us on 08-9386 0047.
