ATO taking a closer look at investment properties

Owning an investment property can be tax-effective, but it’s also one of the ATO’s most closely monitored areas. Here are five common errors that most often trigger ATO follow-up, and the related issues to keep in mind.

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Over-claiming repairs that should be capital works

Repairs and maintenance can be claimed for work that remedies or prevents defects, damage or deterioration arising from using the property to earn income. These expenses are generally deductible in the year they are incurred. By contrast, capital works are structural improvements, alterations or extensions that go beyond merely fixing wear and tear. If the work improves the function or value of the property, it’s likely to be capital in nature. Capital works are usually claimed at 2.5% over 40 years (subject to specific exceptions).

Claiming deductions during private use periods

You can’t claim deductions for interest or other expenses for periods when a holiday home or mixed-use property is used privately, even if the private use is brief. To legitimately claim deductions, the property must be rented or genuinely available for rent. This may include limited/no advertising, offering during low demand times or rent attached to unreasonable conditions such as above-market rent or overly restrictive tenant requirements.

Repeatedly refusing suitable tenants without valid reasons can also indicate the property is being held for personal use rather than income producing purposes.

Claiming incorrect interest deductions

You can only claim the portion of interest that relates to the rental property. If a loan’s used for both private purposes and rental property expenses, the interest must be apportioned. This applies whenever the mixed use occurs at any time during the loan and continue over the life of the loan.

Poor record keeping and lack of substantiation

You must keep records of your rental income and expenses for at least five years from the date you lodge your tax return. If a dispute with the ATO arises during that period, you must retain relevant records until the dispute is resolved.

Not reporting all rental-related income

Rental-related income includes more than just rent. It can also include bond money retained for unpaid rent or damage, letting or booking fees from cancelled reservations, and insurance payouts, whether for property damage or loss of rent.

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