Knowing the ins and outs of tax deductions for landlords

Expenditure on rental properties confuses many landlords and the tax office always keeps this area under the microscope. In fact, they now have supercomputers which can scan your claimed expenses and compare them to the norm. Any unusually large expenses are flagged for further investigation.

The basic principle is that money spent to maintain a property in the condition it was when you acquired it is tax deductible. If you spend money to make it better than that, it is a capital improvement. For example, if the house needed painting when you bought it, the costs of re-painting it could not be deducted from that year's taxable income.

The costs of repainting can be depreciated over 40 years at 2.5 per cent a year, any of the costs remaining unclaimed when you sell can be added to the cost base to reduce the capital gain.

Later, if the paint starts to peel, you can do a re-paint and claim a tax deduction in the current year.

Be especially careful not to claim repairs when the repairs themselves are of a different nature to the original structure.

If you replaced a metal roof with tiles, the whole cost would be a capital improvement and you could not claim it as a tax deduction what it would have cost to repair the original metal roof.

However, as usual, there are anomalies. The tax office considered that underpinning a building due to subsidence was a capital improvement but pulling up the carpet and polishing the floorboards was an immediate deduction.

Fences can be a trap. If you make the mistake of trying to replace the whole fence in one go it will be treated as an improvement and you won't be able to claim a tax deduction.

However, you can replace the entire fence over time and claim a tax deduction as long as you do it by a progression of small repairs.

You can claim the cost of removing trees if they become diseased or are causing damage to buildings or pipes, but you can't claim for removing a tree with the potential to cause damage or because it is creating a hazard by dropping leaves.

Another danger is that our tax system works on self-assessment.

This means the Tax Office no longer checks your return, but relies on your honesty.

Now, instead of giving all tax returns a cursory check, they select a sample for a detailed audit every year.

Naturally if any errors are found you may be liable for back tax and penalties.

The danger is that you may think you have got away with something when in reality you have not yet been chosen for the dreaded audit. A reader once told me it was possible to claim the cost of building a carport on an investment home as a tax-deduction.

When I told her it wasn't, she replied, "Well I put it on the tax return and they passed it."

In reality they hadn't looked at her return - yet!

I am not sure if I have read you correctly but if you own an investment property and sell it can you contribute the proceeds as a downsizer contributions.

You must comply with the criteria to be eligible to make the contribution. You must have owned your property for a continuous period of at least 10 years, which is usually measured from the date of your original settlement when you purchased the property, to the settlement date when you sell it. The property being sold must be your family home (main residence) at the time of the sale, or it must be partially exempt from capital gains tax under the main residence exemption.

You have written about the benefits of keeping most of the family super in the younger spouse's name. I am 69, my wife is 65. She is about two years away from the pension and we are both retired. I receive a defined benefit pension of about $1900 nett a fortnight, and $299 part-age pension and have about $460,000 in Host Plus (accumulation phase) and my wife has about $30,000 in super. From what I have read I should transfer the bulk of my super into hers, where it will be sheltered from Centrelink, until she reaches pension age, when she can apply. But I think I can only transfer a max of $110,000 each year according to the ATO. Would that be correct?

Under the existing rules the maximum non-concessional contribution is $110,000 a year, but this will increase to $120,000 on July 1. You could utilise the bring forward rules and contribute $330,000 now to your wife's account. I can't see this will have any effect on your pension, because based on the information provided you are income tested and moving $330,000 to your wife's superannuation fund will have no effect on that because it's an asset change.

If I lend my mother-in-law say $250,000 and take equity in her current home can I then use that as an investment property and get the tax break? Can this work?

I assume you mean tax deductions for interest on a loan, and depreciation allowances on the property. To get interest as a tax deduction, you will need to have a loan to buy an interest in that property, and the property will need to be income producing, which means your mother-in-law will need to be paying a market rent. Given that the income tax rates change on 1 July and the 30% marginal rate band will extend from $45,000 a year to $135,000 a year. Any tax savings for somebody in that bracket would be minimal. You'd be paying 70% of the cost and 30% would be the tax break. I can't see this being a practical solution.