As the cleanup continues in the many flood affected areas throughout Australia, rental property owners are beginning to feel the full impact of the damage caused to their properties.
It could be many months before their properties are repaired and their tenants can return. This may mean a long period without any rental income coming in along with costly repair bills to pay.
But something they may not have considered yet is the tax implications of the damage and the recovery. While this may not seem to be a high priority at the moment, not understanding their rights may be very costly when it comes to preparing their tax returns this year and for years to come.
So what are the big tax issues rental property owners need to be aware of right now?
Travel to inspect the damage to your rental property will be tax deductible. Costs you can claim for include airfares (or other transport costs), accommodation, meals and incidental expenses, so keep receipts for everything.
Disaster relief payments received from charitable organisations are NOT taxable income. And if you use these payments to make repairs to your property you WILL be entitled to claim tax deductions for these costs.
Insurance payouts for damage caused to your property or for loss of rental income ARE taxable income, so you may end up with a tax bill if you don’t spend the proceeds on repairing your property.
Demolition and clean up costs will be tax deductible, but the amount you can claim will be limited to the income you receive from your insurance payout for these costs plus any income you receive for selling the scrap materials. Any costs in addition to these amounts will be classed as capital costs (so are not tax deductible until the property is sold).
If your rental property was completely destroyed by the flood there may be capital gains tax consequences. The payout you receive from your insurance policy will be classed as the sale of your building. You should speak with a tax accountant about the capital gains tax implications before starting to rebuild as every situation will be different.
Repairs to your property WILL be tax deductible, but it is important to make a distinction between repairs and renovations or improvements as these will NOT be immediately tax deductible.
Repairs – a tax deduction is allowed for the full cost of the repair in the year it is completed and paid for
Improvements – the cost must be depreciated as either a part of the building (over 40 years) or as a separate asset (over its effective life)
The distinction between the two is not as obvious as it may seem. For example, if your entire kitchen needs to be replaced due to the flood damage, the cost of this will be classed as an improvement and will need to be depreciated over 40 years. But if you just have to replace the laminated benchtops and doors in the kitchen (and not the appliances and the cupboards themselves) then this would be classed as a repair. However, if you choose to replace the old laminated benchtops with a different material, say caesar stone which will wear better, then this would be classed as an improvement and would have to be depreciated over 40 years.
So to ensure you are able to claim as much of your costs as possible as repairs, it is best to get advice from a tax accountant before commencing any work.
Interest on loans taken out to pay for the repairs, renovations or improvements to your property WILL be tax deductible for the life of the loan.
Ongoing property holding costs WILL continue to be tax deductible, even if you are not receiving any rental income, provided your intention is to repair the property and then resume renting it. You will be able to continue claiming for holding costs such as mortgage interest, council and water rates, insurance, land tax and body corporate fees.
And if you find the cost of paying for your mortgage, the repairs and other ongoing expenses over the next few months becomes too difficult, you may be eligible to apply to the Tax Office for a short term reduction in the PAYG tax withheld from your salary or wages to give you some extra cash in your pocket each week. This means that your employer will take less tax out of your pay, giving you access to extra money now rather than waiting for a tax refund at the end of the year.
If you find you need this extra cash, you should get advice from a tax accountant to work out how much you can claim and they can also help you with completing and submitting the application forms.
Personal Tax Specialists are experts in the tax issues associated with rental property ownership and have offered to provide free advice to landlords affected by the floods. Simply contact Personal Tax Specialists Pty Ltd on 1300 335 675 or email firstname.lastname@example.org from anywhere in Australia to organise a free phone appointment with one of their qualified tax accountants.
Tracey Collins, for the Personal Tax Specialists team