Do you own a rental property that stands vacant for any period of time? Or does your investment property double as a personal holiday home?

Yes? Then this article is for you.

The ATO has warned that claims for deductions relating to rental properties for the Y.E. 2017 will be subject to close scrutiny.

Properties must be genuinely available for rent

The ATO’s beef here is with expenses claimed on holiday homes during non-deductible periods.

Non-deductible periods include times when owners make personal use of their properties, or when they’re not available for rent for some other reason.

At these times expenses such as interest, depreciation, repair costs, council rates, building insurance, electricity, gas and water are not deductible.

So if you only let a property out for part of the year, you can only claim deductions for expenses apportioned to those periods when it’s genuinely available for rent.

The key point to understand here is that it’s only OK to claim deductions for an empty rental property so long as you’re making every reasonable effort to let it out. It must also be in lettable condition.

Note: Even though you can’t claim these expenses as deductions against income tax, some can be added to the “cost base” of the property as something called “third element costs”. When the time comes to sell your property you can use this provision to help reduce your capital gain on the sale.

The burden of proof is on you

If you’re claiming for expenses relating to periods when your property was unlet, you have to provide clear evidence that it was genuinely available for rent.

Circumstances that would invalidate your claims for deductions include:

  • Limited advertising – for example, where your advertisement has limited exposure to potential tenants.
  • Properties that are not really lettable – – for example, because they’re inaccessible for some reason, in an undesirable location, or not in a fit state to be let.
  • Where unreasonable conditions are placed on potential tenants e.g. excessive rent, requiring references for holiday lets, or simply refusing to let without good reason.

As such, it’s important to make a point of keeping as much evidence as possible about your efforts to advertise your property.

Evidence you should be gathering includes:

  • Receipts for advertising, details of ad placements and copies of the advertisements themselves.
  • Correspondence with letting agents and advertising outlets, such as confirmation notices.
  • Photographs of any signage outside the property.
  • Copies of enquiries from potential tenants.

Ideally, you should keep a log of all your advertising, enquiries and evidence of market rents which you can present to the ATO if challenged.

Discounted Lets Have Restrictions Too

Restrictions on expense claims don’t just apply to periods when your property is unlet.

If you let your property out at deeply discounted rents, any expenses you claim for that period cannot exceed the rent you charge.

This would apply to situations where you let your property out to friends or family at a nominal just rent to ‘cover expenses’.

If you really do want to cover your expenses during such periods, your nominal rent needs to reflect items such as building insurance, interest and depreciation.

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