Know what deductions you can claim
So you have taken out a loan to buy a new investment property. Now you can claim certain deductions in your tax return. But specifically what costs can be legitimately claimed? Primary claimable costs include:
- Stamp duty charged on the registration of a mortgage
- Title search fees charged by the lender
- Loan establishment fees
- Lenders mortgage insurance (taken out by the lender and billed to the borrower)
- Mortgage broker fees
- Fees for a valuation required for loan approval
- Costs for preparing and filing mortgage documents
What mistakes should you look out for?
There are several ‘recurring offenders’ amongst borrowing expense claim errors. Some repeat mistakes that the ATO knows only too well include claims for:
- Stamp duty deductions
Stamp duty is charged by the state government upon transfer of the property. This is not a legitimate borrowing cost and therefore cannot be claimed as a deduction. What you can do though is include stamp duty in determining the cost base of the property for the purpose of capital gains tax (CGT).
- Full borrowing expenses
Not all borrowing expenses can be claimed in full. Those over $100 must be spread over five years or the term of the loan, whichever is less. An exception occurs if you repay the loan in under five years. Here, you are entitled to claim a deduction for the balance of the borrowing expenses that same year.
- Private purposes
Sometimes you may take out a loan to buy or renovate a rental property but this endeavor may not take up the full amount of the loan. So you may use remaining proceeds for personal purchases like a new car. Remember that claimable borrowing expenses must be related specifically to your rental property. You cannot claim deductions on loan funds that have been put towards private purposes.
Other pitfalls to avoid
Property investors are also put on notice not to:
- Claim initial repairs and capital improvements as immediate deductions. Rather, these should be claimed as capital works deductions.
- Claim deductions for any expenses incurred while friends and family enjoyed use of the property free of charge.
- Claim the cost of travel to inspect the property when the main purpose of the trip is a personal holiday.
- Claim deductions for a property that is not available for rent.
Ruthlessly accurate and sincere claims are a key way to garner ATO confidence and reduce your chances of being selected for an audit or review of your property portfolio. Should you need any advice or assistance in making borrowing expense claims, Gandrid Consultants would be happy to help.