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Tax rental income statements record every dollar received on investment properties, but it doesn’t reflect how many dollars an investor actually takes home, says TLK Partners property expert Matthew Mousa.

Part-Year Rentals Affect Property Investors Tax Claims Says TLK Partners Expert Matthew Mousa

Tax rental income statements record every dollar received on investment properties, but it doesn’t reflect how many dollars an investor actually takes home. Rental property investors, will have had to settle a lot of bills in order to receive the dollar bills listed as income – without doing so, they would have received a lot less. But what happens if an investment property is only rented out for part of the year? TLK Partners’ propertyspecialist, Mr Matthew Mousa, looks at the tax implications.

Sam and Jane were looking for tenants, but made it way too difficult for anyone to rent their property. They asked for references even for short term tenants, and barred children and pets. And they also demanded final approval, despite advertising their premises through an agent. To top it all, not one prospective tenant earned that approval.

In Steven and Sally’s case, they advertised their “rental” through an agent, but restricted it to being only available outside school holidays, when there was no demand for renting a property in a remote location with difficult access. They also had no tenants during that year. Both couples had their expenses claims rejected immediately by the tax office.

“If the Australian Tax Office has cause to believe the property was not truly ‘available to rent’, it will not sanction expenses claims, because owners made it too difficult for tenants to rent their property,” Mousa warns. “While it is sometimes hard to believe it, the tax authorities are trying to play fair – they only want their share of the rental money you have actually pocketed.”

But they want investors to play fair, too, by claiming deductions only on expenses directly related to earning it. So expenses that investors incurred for personal use of the house don’t cut it as far they are concerned. Every homeowner has expenses running their properties and they can’t claim them against tax.

The overall principle is that investors can only claim expenses with regard to costs while your property was actually rented out, or while real intention was being shown to make an income out of the property, which is when, as tax authorities term it, it was genuinely “available to rent”.

Stating entire income and then claiming the costs of earning it, changes the gross income to a nett income, giving a far more valid picture of what profit was made, not just your bank account balance. It is from this final clean figure that the tax authorities slice their share of the pie in the form of taxes, Mr Mousa explains. However, the final figure changes, because the claimable expenses do, if a rental property does not operate all year through.

The taxman also accepts that there are good years and bad years for rental property owners, when they simply don’t have many tenants. Yet, as an owner, investors go on having expenses involved in trying to attract tenants, so some expenses involved are still claimable even when rental income is low.

If either of the above couples had indeed managed to land a tenant, even for a short period, they would fall into the category of those rental property owners who have to apportion expenses according to how much of the year the premises were rented out, or were honestly available for rent.

Joining them are owners who openly rent out their houses for a short period of the year, using it themselves the rest of the year, and those who do the opposite, using it themselves for a short holiday, and making it available for rent the rest of the year. Any expenses that come up while used personally or by friends are enjoying the property privately, can’t be claimed. So these taxpayers will also have to do apportionment claims.

Apportionment means that those costs directly tied to rental income can only be claimed in proportion to how much of the year tenants helped you generate it. If tenants rented your property for 35 weeks of the year, the expenses would be multiplied by 35/52 to determine the claimable share of the year’s expenses.

Exceptions are those expenses brought about during the course of the rental process. These include estate agents’ commission, advertising for tenants, phone calls to fix damage tenants caused, and the cost of removing any rubbish they left behind.

Matthew Mousa is a partner at TLK Partners, a company that takes care of the wealth management and accounting needs of ordinary folk, small and medium businesses, and high value individuals. TLK Partners, Chartered Accountants and Wealth Management Company website, or call (02) 8090 4324.

This material is of a general nature only, it does not take into consideration your financial circumstances, needs or objectives. Before making any decision based on this content, you should assess your own circumstances, seek professional advice or contact our office to be directed to the appropriate professional. Whilst all care has been taken in presenting the material neither TLK Partners or its associated entities guarantee that the material is free of error and, the information may have changed since being published.

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