H & R Block Basic Course
Chapter 9
HINTS Understanding rental income is about understanding alternatives. Here
are some of the important alternatives that you need to be clear about: ·
Expenses
of buying the property vs. expenses of getting the loan 1] Expenses of buying the property are not
deductible, but are part of the capital gains calculation when the property
is sold. You should always record them for the future. 2] Expenses of getting the loan are borrowing
expenses and are usually deductible over 5 years. ·
Mortgage
insurance to protect the bank vs. mortgage insurance to protect the property
owner 1] Mortgage insurance to protect the bank is a
one-off payment when the loan is taken out, and counts as a borrowing
expense. 2] Mortgage insurance to protect the property
owner is paid annually, and is not deductible at all. It is viewed as a
private expense. ·
Joint
tenants vs. tenants in common 1] Joint tenants: one title, ownership is 50/50
(or whatever is appropriate). 2] Tenants in common: two titles, percentage
breakdown of ownership can be anything. ·
Repair
vs. improvement ·
Decline
in value vs. capital works deduction 1] Decline in value refers to fixtures and
fittings within the property. 2] Capital works refers to the original cost of
construction or to structural changes to the property, usually claimed at
2.5% P.C.
Question 1
a) Joint
tenants co-own a rental property (there is one property title), and the income
and expenses (apart from individual mortgage loans and individual travel
expenses) must be apportioned 50/50 or in whatever equal portions that are
appropriate.
Tenants-in-common each own part of a property as a
separate entity (there is more than one property title). For example, a
tenant-in-common can sell their part of a property without consulting the other
owners, which would not be possible in the case of joint tenants. A
tenant-in-common can own any portion of a property, even one per cent,
depending upon the title. The income and expenses are then apportioned
according to the portion defined on the title.
b) Provided
that the property is actively advertised throughout the year the owners can
claim for the periods when it was untenanted. However if the owners are living
there for short periods then that is considered private use, and such periods
would not be deductible.
c) YES.
Provided that the property is available for rent, and is being advertised for
rent. However if the property is being renovated the owner cannot claim
deductions for that period.
d)
NO. The expenses of restoring a property to its
original condition after the tenants have left are only deductible if paid for
in a year in which income was received for the property.
e)
The 50 % of the bond money is declared as income, and
the repair of the stove claimed as a deduction.
Question 2
a) The stamp duty on property transfer is an expense
of buying the property, not an expense of obtaining the loan. Hence it is not a
borrowing expense.
Borrowing expenses = 200+741+206+720 = $1867.
b)
i) Two years
ii) five years
Borrowing expenses of $100+ are claimed over five
years or the term of the loan, whichever is shorter.
Question 3
a) Quantity
surveyor (most commonly used), clerk of works, supervising architect, or an
experienced builder.
The cost would be claimed at item D10 (tax affairs)
because it is a cost of complying with ATO requirements.
b) 139,700 x
2.5% P.C. = $3493 annual claim (prorated for part year).
1999 plus 40 years = 2039. Hence
they would have 33 years to claim, assuming the property remained a rental
property.