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Property Owners’ Tax: How do I claim on borrowing expenses?
While some rental property expenses can be claimed straightaway, there are a number of expenses which are only deductible over a number of years. Baxton Property Management in Hobart tries to ease your way through the minefield of these sorts of tax claims. The tax laws regarding rental property have changed recently, and it’s important that investment property owners get to understand the new regulations.
What expenses are deductible over a number of years?
Borrowing Expenses are one of the three different types of expenses that the tax man expects you to deduct over an extended period of time. The others are the Depreciation of Assets and Capital Works Expenses.
There are certain unavoidable expenses that you will have to pay when you borrow money to purchase an investment property for extra rental income.
To start with, you will have to pay the institution that lends you the money for establishing the loan, and you will also have to pay a fee to the mortgage broker. You’ll also be charged for the lender searching for the title deed. Then the lender will send a building inspector to inspect the property and make a valuation. This expense will also be your responsibility.
That’s just the start: Preparing and filing the mortgage documents requires stamp duty on the documents, and the expense of this will be yours to carry. And, believe it or not, the lender’s mortgage insurance is also for your account.
These are all classified as borrowing expenses that are deductible over a number of years.
What borrowing expenses are not deductible?
- The insurance you are required to take out to cover your mortgage in the event of your death, disability, or unemployment.
- The Interest the lender charges you.
- The Stamp Duty that’s charged on the transfer of the property. This is not to be confused with the stamp duty on the mortgage documents, which is deductible.
Certain rules govern the deductions
If your total borrowing expenses are less than $100, you can claim the total amount in the year you took out the loan. However, if your total borrowing expenses are more than $100, you will have to deduct them over five years, or the length of the loan agreement, whichever is shorter. This means, if your loan is repayable over three years, the deductions are calculated over three years, and not five years. If you repay your loan earlier, you are allowed to deduct what’s left of the borrowing expenses in the year that you repaid the loan.
If you took out the loan during your first income year, you can only claim a proportional amount of the borrowing expenses you would normally claim for a full year. If you took out the loan, say, three months into the new tax year, you would only be able to claim 75% of what you would claim the next year, and every year thereafter, until the three or five year term is completed and the loan is paid off. The same proportional calculation will be necessary in the final year.
In further blogs on property owners’ tax issues, we will deal with depreciating assets and capital works deductions. Baxton Property Management, the leading property managers in the Hobart area, have managed many excellent investment properties. Visit them at the Baxton website.
- Property Managers on owners’ tax: Rental business or investment?
- Property managers on owners and tax: Co-owners and the income split
- Tax: Maximising owner benefits?
We hope you enjoyed this article
The information contained in this article is based on the authors opinion only and is of a general nature which is not indicative of future results or events and does not consider your personal situation or particular needs. Professional advice should always be sought relevant to your circumstances.
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