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Rental property tax: Interest, land tax and other deductibles
In this, the last of a series of three articles examining immediate deductions associated with your rental property, Baxton Property Management in Hobart brings you a closer look at certain areas like interest, council rates, land tax, legal expenses, tax related expenses and mortgage discharge expenses.
Interest on loans
The interest that you are charged on a loan raised to acquire an investment rental property, is deductible. If, however, you change your mind and decide to use the property for personal use, you can only deduct the interest charged on the loan until your intention for the property changed.
As long as the property is rented, or available for rent, you can also claim the interest on loans you use to purchase depreciating assets, repairs and renovations. The deduction applies from the time you took out the loan, even if you use the loan to purchase land to build a rental property, or to finance major renovations on a property you intend to rent out to tenants when the renovations are complete.
However, most banks in Australia offer loans that can be used to buy rentable property and, at the same time, to get a new car. In this case you may only deduct the proportion of the interest on the loan that you used to buy the property. The interest charged for the section of the loan used to fund buying the car may not be deducted.
The important thing about land tax deductions involves the time period for which you are liable for it. This is not dependant on when you submitted a return, or when an assessment was issued by the tax authority. Instead it involves a strict relationship between what tax year the liability was incurred in, and what year’s rental income it can be deducted against. These two must match completely.
The timing of your land tax liability differs from state to state. In many states the liability is for the period during which you used the property to generate rental income. When a land tax assessment is made, and an arrears land tax assessment issued, sometime later, this might not be done in the same year during which you were renting the property out to tenants. If you receive an arrears land tax assessment and pay the arrears, the land tax must be deducted against the rental income for the same year the arrears tax assessment refers to. So if the arrears assessment refers to rental income earned in 2015, you can only deduct it against that year’s income, even if the assessment was only issued, and paid, during 2017.
If you should sell the property, and there is a land tax adjustment, you will need to declare the amount you get back as an income for the year in which this pay-out is received.
Legal expenses are deductible for:
- Costs incurred for evicting a non-paying tenant
- Legal costs for court action for loss of rental income
- Defending damages claims for injuries to a third party incurred on your rental property.
Other legal expenses relating to the purchase or sale of the property and defence of your title deed, are deemed of a capital nature and so are not deductible.
Mortgage discharge expenses
Mortgage discharge expenses generally involve penalty interest payments for discharging, or paying off, the mortgage early. This penalty interest is deductible if the money loaned to purchase the rental income property was secured by a mortgage, and the owner’s ability to pay the mortgage off would be affected by the inclusion of penalty payment for doing so.
The mortgage discharge expense is also deductible if the penalty interest payment was made to free the taxpayer of having to continue to pay interest on the loan.
Our friendly consultants at Braxton Property Management will continue to provide information regarding tax, or other areas of interest to rental property owners, or their tenants. Visit us on the Baxton website.
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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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