Income & Expenses from Renting Your Property – Tax Issues

Case Study: Michael & His Wife Jenny.

If you have finally settled on your rental property and your tenants have moved in, you’ll need to work out what income to declare. Michael  purchased an off-the-plan unit a few years ago. So, let’s make sure he’s on the right track:

Jim: Michael, how would you explain the income from your rental property?

Michael: Well, it includes everything I received when renting out my property. It also includes the income when I rented it at a much reduced rate to family for 18-months due to a financial crisis they were experiencing. Although in that case, the tax deductions I claimed were limited to the amount of rent I received in that time, which was actually less than the expenses.

Jim: And that’s all included in your tax return?

Michael: That’s right. And it’s not just the actual rent. I also included some rental bond I kept for repairs due to damage caused by my tenant, but that is offset by the repair expenses that the bond covered. One year I declared extra income for a government rebate for the purchase of a solar hot electricity system. Last year I had to declare an insurance claim payment received in July as income, because the cost of repairs were claimed  as a deduction a few days before the end of financial year.

Jim: So, Michael, if you owned the property with your wife, how would that affect your rental income?

Michael: If I own the property equally with my wife, I’d have to declare only half the income, but I can only claim half the expenses. Because Jenny is a stay at home mum with no taxable income, it made more sense to put the unit in my name alone.

Other Considerations:

Michael is pudently employed with good income. Keep in mind, if Michael increased his portfolio with a higher proportion of debt to equity,  he would be “negatively geared”, that is his rental income would be less than the loan interest and other expenses. In this scenario Jim can claim the losses against his other income such as salary or wages. In effect, the Australian Tax Office would be helping him pay off the properties faster due to signigicant tax reduction.