When it comes to claiming borrowing expenses on tax, most property investors get it wrong. How do you do it the right way? Bushy Martin explains in this week’s Bush Bite.
What borrowing expenses can you claim against your tax? I asked is because apparently, according to the Tax Office, 90% of tax returns contain errors in this area. So in today’s Bush Bite, I thought I’d help you to correctly claim your borrowing expenses. (Just to make a note, I’ll cover off on loan interest expenses in a separate segment.).
Now, in relation to borrowing expenses, these are costs that are incurred when taking out your investment loan to purchase your rental property. And if any of these expenses are under $100, then that amount can be fully claimed in that financial year. If they’re over $100, they are claimed incrementally spread across five years. Now, deductible borrowing expenses include things like any lender’s mortgage insurance that you might have paid on the property, stamp duty charged on the mortgage itself and any title search fees charged by the bank. They also include any of your mortgage broking fees if you used a broker. They also include things like a bank valuation fees, any loan establishment fees and any costs of preparing and filing the mortgage documents.
On the flip side, unclaimable borrowing expenses include anything that’s classed as a capital cost. Now these can be associated with buying the property and they include things like any of your conveyancing fees, legal fees, a title, search costs and any cost for a test and billing inspection. And, of course, the stamp duty. All of these are classes, capital costs, and they come off the cost base of the property if you sell it at a later time. Other unclaimable borrowing expenses include any principal repayments on investment loan, and interestingly enough, they also exclude insurance premium costs where the policy actually pays out the loan if you die, you’re disabled or you’re unemployed. Finally, you can’t claim any portion of a loan that’s used for private purposes.
I hope this clarifies it. If you want to get the nitty gritty details, there’s a great guide that the ATO produce so jump on the site and it’s called the ‘tax tool kit for rental property.’ So grab yourself a copy if you want to get the nitty gritty or have a chat to your accountant. I hope that helps.
That’s the food for thought for this week.
Want to unlock freedom with property and finance? Let’s talk.