No Rental Income
Can you claim rental expenses (depreciation) if your property does not produce rental income?
The answer is YES, here is an example.
Joe & Mary have owned a property for several years in Sydney, New South Wales and decided to make it available for rent in January this year.
However, despite repeated attempts and dropping their rental asking price, they have not been able to secure a tenant. So - no rental income.
Can they claim in their tax returns, expenses related to this property such as interest, depreciation and other?
Joe & Mary can still claim the rental expenses (including depreciation) on their property from the time they first advertised the property for rent.
Expenses accrued to the property being genuinely available for rent include:
Interest on loans, local council, water and sewerage rates, land taxes, emergency services levies, and depreciation incurred during renovations to a property that is intended to be rent out.
However, deductions cannot be claimed from the time the property intention changes, for example, if the property owner decide to use the property for private purposes such as living in it themselves.
Let’s look at this more closely.
Joe and Mary need to prove the property is genuinely available for rent. This means they must show they have advertised in ways so that all potential tenants may see it. eg: advertised not just in their workplace or word of mouth but through actual paid media and that they have considered all circumstances of potential tenants and not placed any restrictions on the potential tenant. eg: no pets, no children or not accept any tenant the agent may put forward.
If Joe and Mary have not done this then it could mean that they do not genuinely want to rent the property but use it for their own personal use. Therefore, they cannot claim any deductions for the property.
More information can be found in the ATO Guide Rental properties 2024 this guide will also provide information regarding vacant land, holiday lettings etc.
What if your agent can’t find a tenant for your property?
Consider looking at the example below to resolve this dilemma.
One consideration is to look at reducing the amount of rent as some income is better than none!
However, agents may not want to reduce the rent as this means they may not receive as much in the fees they charge but remember if there is no rental income then the agent doesn’t receive any income either. The final decision is up to the property owner after all.
Here is an example to help understand where this could apply.
Keith and Margaret purchased 2 investment properties in Kalgoorlie, Western Australia.
At the time of purchase, gold was booming and as Kalgoorlie is a mining town, the mining companies required their working staff to stay locally. Consequently, demand for housing was up, rents high and there was certainly no trouble in securing a tenant!
This made the properties “positive cashflow”.
After a few years gold dropped in price so there was not as much mining going on and less people moving into the town and looking for a home to rent.
Keith and Margaret after careful consideration, reduced the rent to secure a tenant and bring in income. This then made the properties available to be “negatively geared”.
This may not be suitable for all property investors who rent out their properties but the advantages of applying this change for Keith and Margaret paid off substantially.
As they were both employed, they contacted their accountant and were advised to apply for a PAYG tax variation.
They then contacted Write it Off and made an appointment to have a Property Depreciation Schedule drawn up and with this report, they increased their cashflow for the year.
This is one strategy that property investors can use to improve their cashflow and their abilities to build up a nice property portfolio.
If you would like to apply for PAYG without an accountant, here is the link to the ATO PAYG tax variation form: PAYG withholding variation application | Australian Taxation Office.
Contact us to organise your property depreciation report with our property surveyors today.