Property investor tips

Anita Challen:
If you're using a property partly to rent out and partly for personal use, expenses need to be apportioned accordingly so you can only claim it for the period that its earning you that assessable income.

Jenny Wong:
Welcome to With Interest. I'm Jenny Wong, Tax Lead at CPA Australia. I'm joined by Anita Challen, Assistant Commissioner of the ATO. Anita, welcome to With Interest.

Anita Challen:
Thanks, Jenny.

Jenny Wong:
Now, Anita, our listeners today will appreciate your guidance through the key areas investors need to get right in 2026, including short-term rental deductions, apportionment rules, and common CGT triggers. We'll also look at the practical steps taxpayers can take to avoid the most frequent mistakes from record keeping to interest deductibility and repairs versus improvements. My first question for you is about rentals. They are always a talking point. What's important to keep in mind this year, Anita?

Anita Challen:
Yeah, there's certainly a lot to navigate when it comes to rental properties and we appreciate that the conversations tax professionals have with their clients can be critical to ensure that they get it right. We're also very mindful of what is a growing amount of misinformation that is going around, and we are warning taxpayers to ensure that they are getting all of their information from verified sources, whether that's from the ATO's website or from you as tax professionals. We're also mindful that the earlier you can have those conversations with your clients, even before they purchase a property.

When they're just starting to think about making that decision to go ahead and purchase a rental property, the conversations that you have with them around their tax obligations, making sure that they're set up for success from the outset, keeping those all important records of purchase prices, maintaining the right records throughout the ownership of the property, and of course, making sure that they continue that all the way through until they dispose of that property is critical and important to have that so that it's not just during tax time that they realise what it is that they need to do.

The ATO also has some helpful resources online. We have a brand new record keeping fact sheet, which is set up as a checklist. You can either download it and complete it online with your client, or you can print it out and have it as a hard copy if they'd prefer. It takes you through all of the relevant questions to make sure that you're covered across the board from start to finish when it comes to owning a rental property. We'd really encourage all agents to have a look at it. It's available on ato.gov.au/rentalrecordschecklist, and really use it to have those right conversations with your clients at the right time.

Jenny Wong:
Short-term rentals and holiday homes continue to grow. What should hosts understand before they launch?

Anita Challen:
Holiday homes and deductions are a key focus area this year and we recently published some updated guidance just to confirm our position when it comes to assessing income and also deductions where holiday homeowners might be undertaking some shorter term rental opportunities. With the growing use of online booking platforms, it's much easier for holiday homeowners to undertake short-term rentals. And it is important for clients to be able to ensure that in renting those properties, the primary purpose is to mainly produce accessible income.

If it's not, the new advice confirms that they won't be able to claim as an immediate deduction those ownership expenses such as interest, rates and water council fees, and things like that. They'll still be able to claim as an immediate deduction the costs of actually putting those properties for rent, so advertising fees, booking fees, and of course, any cleaning that may be required after someone has used the property, but it is now an important consideration for people who might be looking for those shorter term rentals.

If the holiday home is mainly used to produce income, but there are some periods where you're using it for personal use, of course, the other important thing to note is that you can only claim the costs during that period where it is available for rent. So apportionment is key in those instances. We do sometimes see some short-term rentals avoiding availability during those peak periods such as school holidays or applying some restrictive conditions such as rental prices that are just ridiculously high, making it very unlikely that they will actually be rented out.

And that's okay to do that, but importantly, you do need to understand the consequences of that in the context of those ownership costs. What I will say is that even though you can't claim those as a deduction, you can, of course, include them as the third part of your cost base, which is an all important context for when you dispose of the asset and you're considering any capital gains or losses.

Jenny Wong:
To some people, claiming loan interest may seem straightforward. What are some of the things that can make this more complicated and what steps can people take to make things easier?

Anita Challen:
Yeah. So if you have a loan and you've used it to buy the property, if you've used that same loan to buy a depreciating asset such as an air conditioner, or if you've used it to pay for the cost of repairs or maintenance and things like that, or to finance even some major renovations or improvements, the interest on that loan is absolutely deductible. Where it can get a little bit tricky is if you're using the same loan for any personal or private use.

For example, if you refinance or redraw money for a holiday or for school fees, you do need to make sure that you're not claiming the interest associated with the portion that's used for those personal expenses. And the other important thing to note is that good record keeping is really critical. You'll need to take into account that apportionment for the full life of the loan.

Why it's so important to keep those accurate records, just to make sure that when it matters, you've got everything up to date and to hand so that you can easily apply that apportionment when you need to, when you're lodging your tax return.

Jenny Wong:
So staying with apportionment for a moment, this is still where a lot of errors occur. Where do you think clients need the most support?

Anita Challen:
It's mostly helping them understand when they need to apply that apportionment. So I think in most instances, people would understand that if you're using a property partly to rent out and partly for personal use, expenses need to be apportioned accordingly. So you can only claim it for the period that it's earning you that assessable income.

What people may not understand quite as readily is that the private use may also apply in instances where you rent out your property to family and friends at below market rates, or of course, those times where you just hold it on the side for your own personal use. The other thing to remember is ownership of the property matters and there's certainly instances where you may, for example, have joint tenancy, which is an equal legal ownership split of a property, just ensuring that those expenses are apportioned in the same way as that legal ownership applies.

The same applies when you're actually declaring the income that you're earning off the property as well. There are alternate arrangements such as tenants in common where the legal ownership isn't split equally. And so again, you just need to make sure that the apportionment of income and deductions is aligned in terms of that legal ownership. And it's best to know the position upfront so that you understand the implications throughout in terms of how that would apply.

The other thing to remember is where only part of the year the rental property is available for that income producing purpose. You do need to apportion based on the number of days that it is available for rent. Similarly, if you're only renting part of your house, so if through your family home you decide to rent out a room, you do need to align the appropriate apportionment associated with the floor area of the room that's being rented out.

You may also then need to apply the number of days if it's not available all year round, so that can get a little bit trickier as well. And in those instances for the time where that room isn't being rented out, the entire property is treated as your own personal use asset, so not an income producing asset that you can then claim deductions on. Look, it can get a little bit complicated. Again, I'm not sure, I've mentioned records a few times, very, very important to make sure your records are up-to-date and that you're keeping records for everything.

Jenny Wong:
Repairs and improvements often get mixed up. What's the simplest way to break this down?

Anita Challen:
So to put it very simply, if you're fixing wear and tear of a property as a result of things that have occurred while it's being teneted, those are considered repairs and you can usually claim those as an immediate deduction in your tax return. Similarly, if you're doing some work to prevent deterioration of certain things on the property or maintaining it, that is considered maintenance. And repairs and maintenance are both immediately deductible in your tax return for the year that you've incurred those expenses.

Where it might vary slightly is if you're doing some more major improvements or renovations. And even if, for example, you're initially thinking it's a repair, so you've got a leaky pipe in your bathroom and you go in and as part of fixing the leaky pipe, you have to remove a few tiles, then you decide you don't like the tiles and you want to replace them all or you want to double sink and an extra bath or any of that sort of thing, that becomes a little bit more like a renovation or an improvement.

They are capital expenses that need to be depreciated over time. You can still claim the costs of fixing the pipe. That is still the repair component of that, but usually you need to depreciate that sort of thing over 40 years. The other area that people may be less familiar with is if you've bought a property that already needs some work and attention, those initial repairs are also not deductible in your tax return in the year that those expenses are undertaken. That's whether or not you know that those things need to happen or not. They are capital in nature and different rules apply.

Jenny Wong:
The ATO now has more visibility over rental and investment activities. What does this mean in practise, Anita?

Anita Challen:
Yeah, look, we do receive income data and information from a range of organisations, including banks, insurance companies, state revenue offices, sharing economy platforms. And what it means is that we have some information to check and crosscheck what you put in your tax return. We do this across a range of areas to instil greater trust in the overall tax system. And essentially, if we see a discrepancy between the data that we have and the data that's in your tax return, we're probably going to give you a call or give your client a call and just check and ask why that is the case.

Jenny Wong:
We spoke briefly about the importance of good record keeping for rental properties, but this really applies to all investment assets. Particularly for working out CGT, what do investors need to keep in... Sorry. What do investors need to keep and why?

Anita Challen:
Yeah, great question. And certainly whether your client's investing in property, shares, units, crypto, it is important that they're keeping really good records. At a very basic level, it's best that they understand how much they've paid for the asset in the first instance, how much they've earned from the asset while they've got it, how much they've sold it for, and of course, those records around any expenses that they've incurred throughout the ownership of that asset.

Some of these records are used for later calculations of any capital gain or loss when they dispose of the asset. And generally speaking, you do need to keep records for a period of five years, and that's five years after that capital gain or loss is declared in your income tax return.

Jenny Wong:
What are some of the common triggers for CGT? Are there some that are... Sorry, I'll start again. What are some of the common triggers for CGT? Are there some that are often overlooked?

Anita Challen:
Yeah, absolutely. So CGT, as we've said, applies to shares, units, crypto, property, and many people will pay attention and be familiar to the sorts of events, CGT events, that therefore occur when you give away an asset or sell it, or if you get shares other than dividends through a managed fund. And that's a good thing because they are all CGT events and so that is important.

There are some other instances though that may occur throughout the ownership of particular assets that are worth paying attention to. A good example is if you are living in a private residence and at some stage you decide to rent out part of that property, again, the example that I used before around maybe you're renting out a room, that is a CGT event and you do need to consider the implications of what that means later on.

From that point on, we absolutely recommend that you maintain those excellent records. Similarly, if you decide to maybe have a sea change or go overseas for a bit and rent out the entire property, it's the same deal. It is also a CGT event. And at that point in time, we'd also recommend perhaps undertaking a valuation on the property using a quantity surveyor or a valuer. It'll make it a lot easier later on down the track when you are calculating any capital gains or losses.

Jenny Wong:
So before we wrap up, do you have any final tips or advice for our viewers?

Anita Challen:
Again, just reinforcing misinformation and the importance of going to a verified source for advice and information. That's a big focus for us this year. Also, we would highly recommend asking your clients lots of questions. So often in the conversations you're having, just prompting them to see if anything's changed, checking if they've recently purchased or disposed of any assets is always a good thing to do.

Check out our recently updated toolkit that you can share with your clients and include in the conversations that you're having. And also, our rental properties guide is another great resource to use.

Jenny Wong:
Properties and investment does come with complexity, especially when the rules shift. So today's discussion highlighted just how important it is for taxpayers to stay informed and keep their records in order. Anita, thank you for sharing your insights.

Anita Challen:
My pleasure. Thanks for having me, Jenny.

Jenny Wong:
Thank you for listening to With Interest. Don't forget to check the show notes for links and resources from CPA Australia and the ATO. If you found this episode useful, please share it with your friends and colleagues and hit the subscribe button so you don't miss future episodes. Until next time, thanks for listening.