**Disclaimer: This blog is intended as a general guide and may not cover all specific situations or reflect the latest legislative changes. For personalised advice that considers your unique circumstances, please consult a qualified tax professional.
The Value of Rental Expenses for Putting Cash Back in Your Pocket
Every dollar earned from your rental properties adds to your overall income and is taxed at your marginal tax rate—the rate at which the next dollar of your income is taxed. For example, if your primary income is $55,000, your marginal tax rate is 30%, or 30 cents for each additional dollar earned. So, for every $500 of expenses you claim, you save $150 in tax. This is why maximising deductible expenses is essential.
Understanding Capital Improvements vs. Repairs and Maintenance
Non-Deductible Capital Items
Costs that are integral to the structure of the building and go beyond “like-for-like” replacements. For example, replacing single glazing with double glazing is not deductible. If the item changes the nature of the property, and will be realised in the non-taxable gain in sale, it is likley non-deductible.
Partly Deductible Separate Assets
This includes separate assets from the building that are related to the rental activity and valued over $1,000, such as ovens, fridges, and furniture, commonly referred to as chattels. You will be entitled to a percentage claim based on the IRD-deemed depreciation rate. For example, a fridge has a depreciation rate set by the IRD of 25%. Assuming the fridge costs $2,000 and is purchased on the first day of the financial year, you will get a taxable claim of $500 in the first year. Note that the IRD rates are annual, so purchases made late in the financial year must be pro-rated. In other words, don’t rush to buy new chattels in March to offset your tax liability.
Fully Deductible Assets Under $1,000
For simplicity, the IRD sets an exemption for small items valued under $1,000. This means, for example, if you purchase a fridge for $999, you can deduct the full amount as repairs and maintenance.
Fully Deductible “Like-for-Like” Building Assets and Repairs & Maintenance
Replacing a single-glazed window with a double-glazed window is deemed an improvement and is not deductible. However, replacing it “like-for-like” with another single-glazed window allows a full deduction as repairs and maintenance. This rule ensures deductions cover wear and tear from rental service but not improvements that increase property value. Similarly, repairs that replace a portion of the building asset or restore the property following tenant damage (e.g., painting or patchwork) are fully deductible.
Commonly Missed Deductible Expenses
- Motor Vehicle Claim
You can claim travel to and from your rental property at the IRD’s prescribed rate. Simply calculate the distance for each trip and multiply by the number of trips made. - Home Office Claim
If you manage your rental property and have a dedicated area of your home for it, you can claim a portion of home running costs based on the work area’s square footage. Additionally, you can apply a 50% flat rate for phone and internet expenses.
Why Consult a Tax Professional
This post covers general principles and encourages you to review potential missed expenses. For tailored guidance, consult a tax professional. At SOM Accounting, we provide [rental work letters] with questions specific to rental deductions to ensure no deductible item is missed and we’re just a call away if you’re considering a large purchase.