Rental property travel – when is it tax deductible?
On the face of it, there seems nothing hard about claiming rental property travel as a tax deduction. Other than working out which motor vehicle method you’re going to use, or what percentage of airfares you’re going to claim, it’s simple, right?
Claiming travel as a tax deduction against your rental property is not simple, and landlords need to make sure they are getting it right! Because when a taxpayer incorrectly claims travel against their rental property, it’s painfully obvious to the Tax Office…
So how do you get it right?
Your travel claim is going to vary depending on the nature of the trip. Some trips will be an outright deduction in the year they are undertaken, and some trips will need to be added to the cost base of your rental property as a capital expense. To get it right, I suggest going out and buying yourself a good quality notebook that you can use to record travel relating to your property. Split your travel according to the following seven headings:
1. Travel to look at a property you are considering buying
Travel to look at properties you don’t own occurs too soon to be related to the earning of any income and will ,therefore, NEVER be tax deductible.
2. Travel to undertake initial repairs BEFORE the first tenant moves in
Rental property repairs will be tax deductible when they are incurred during the period the property is ‘held, occupied or used’ for income producing purposes, and they are attributable either to damage that occurs during the income producing use of the property or to defects that emerge suddenly during that time.
Now read this previous paragraph again and take note of the sections highlighted in bold letters. Note that initial repairs or renovations to rectify damage that existed at the time of purchasing a property does not fall under this definition. The repairs relate to the previous owner of the property, fall under the definition of capital, and therefore need to be written off over 40 years as a capital works deduction. This remains true regardless of whether you let a tenant move in, wait six months, and then undertake the repairs. If the damage was not caused by your tenant then it’s not an outright tax deduction. It’s that simple!
Following on from this, if initial repairs are not tax deductible, then any associated travel will also not be tax deductible. The travel relates to capital improvements and, therefore, must be added to the cost base of the property, decreasing any capital gain when the property is eventually sold.
WARNING: The Tax Office keeps a watchful eye over large repair claims and associated travel claims in the first year of owning a rental property. The majority of times these repairs relate to the previous property owner and should not have been claimed as an outright tax deduction.
3. Travel to undertake improvements on your rental property
Normally something will fall into the improvement category when you start replacing the entire asset or you start changing the nature of the asset. Examples of improvements are:
– Replacing the entire roof
– Replacing the entire fence
– Replacing ALL the electrical wiring
– Replacing ALL the plumbing
Improvements are not an outright tax deduction in the year the work is carried out. They are capital in nature and eligible to be written off over 40 years as a capital works expense. Therefore, any associated travel will also not be an outright tax deduction. This includes travel to your property to watch over the project, travel to the hardware store for materials, and travel to meet with contractors. Any travel associated with capital works must be added to the cost base of the property and used to decrease future capital gains.
4. Travel to undertake repairs that were caused by your tenant
Expenditure on repairs made to a rental property that relate directly to wear and tear or other damage that occurred as a result of renting out the property are generally allowable as a tax deduction in the year the works were carried out. Therefore, travel to the rental property to undertake repair work, visit the hardware store for supplies, or visit contractors for quotes, will also be tax deductible in the year the trips are undertaken.
5. Travel to collect rent
If you manage your own property, you can claim trips to collect the rent as a tax deduction in the year the trips are undertaken.
6. Travel to maintain the property
Travel to do general cleaning and gardening will be tax deductible in the year the trips are undertaken.
7. Travel to inspect the property
Travel to inspect your property is the most common travel claim for landlords. The Tax Office normally views 2 – 4 inspections per year as fair.
You will need to approach this claim with caution. If the intention of your travel was to drive to the city to do some shopping and you thought you might drive past your property at the same time, the travel is really private in nature. Driving past the property was just incidental to the main purpose of the trip which was to do the shopping. Same with flying interstate to inspect your property. Study the purpose of the trip and the works you are carrying out while you are there very carefully. Driving past your rental property for 5 minutes while on a two week interstate holiday may not cut it with the tax office!
My Final word
As you can see, travel relating to rental properties is not black and white. And we haven’t even attempted to go over the different methods of claiming travel in this article. The Tax Office keeps a close eye on the dollar amounts that are placed in the repair and travel boxes of rental property tax returns. They also match these boxes with the date that the property was purchased. I don’t mean to scare my readers, but you really can’t afford to get it wrong.
If you own a rental property and you’re going to lodge your own tax online, then be careful. A normal person who is not working in tax law will find it hard to distinguish between an improvement and repair. I recommend that you find a good accountant that can walk the rental property journey with you. If you really want to lodge your own tax online, then you should approach any works carried out on your rental property with caution. If in doubt, lodge a Private Binding Ruling with the Tax Office.
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