Rent expenses are deductible to the price that they are incurred for the purpose of producing rental income.
Sometimes, rental expenses can be deductible for periods even when the property is not being rented out.
However, this is only the case provided the property is genuinely available for rent. This means, the property is being advertised and tenants are likely to rent the property. In no way can the owner live in the rental property and claim these deductions.
Possible factors that indicate a property is not genuinely available for rent include;
• The way the property is being advertised limits exposure to the property and gaining potential tenants. Ie, only telling people through word of mouth, or only asking people at your workplace.
• The location, condition or accessibility to the property. If the property is not well looked after, or if it is located in the middle of nowhere, it is unlikely tenants will seek to rent it out.
• Placing very strict or unreasonable conditions on the property. Ie, very high rent and lots of restrictions when living in the property
• Refusal to rent out the property to interested people with no legitimate reasons
The absence of these factors from the owner, generally displays that the owner is not serious about renting the property and generating income from the property, and in turn, may have other purposes for the property.
Can I do part-year rentals on my investment property?
Yes, many people choose to use their investment property for both private and commercial purposes. While this is legally allowed, you cannot claim any deductions during the period when you are living in the property. Deductions are only available for the periods in which you rented out the investment property.
For example;
Tom and Cindy own an investment property, which they rent out at market rates and use as a holiday home. They advertise the property for rent during the year through a real estate agent. Tom and Cindy only occupy the property themselves for four weeks of the year.
During that year, Tom and Cindy’s expenses for the property are $34,801. Yet, they only received $25,650 from renting out the property all year. Tom and Cindy are able to claim deductions for their expenses based only on the proportion of the income year the property was rented out. Thus, no deductions were able to be claimed for the four weeks Tom and Cindy used the property.
Can I claim deductions if only part of my property is being rented out?
Yes, however, if only part of the property is being used to earn rent, you can only claim the part of the expenses that relate to the rental income.
As a general rule, apportionment is made on a floor-area basis.
For example;
Jeff’s private residence also has a self-contained apartment. The floor area of the apartment equals one-third of the area of the residence. Jeff rented out the flat for six months of the year at $100 per week. During the rest of the year, his niece lived in the flat rent free.
All of Jeff’s expenses amounted to $9,000. Using the floor-area basis for apportioning his expenses, one-third ($3,000) applies to the flat. However, as Michael used the flat to produce rental income for only half of the year, he can only claim a deduction for $1,500.
About Tyron Hyde
Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.
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