Tax Tips for Property Investors: Rental Income Explained

Anyone who owns an investment property knows that the main source of income comes down to one thing: rent. Your rental and other rental-related income is the full amount of rent and associated payments that you receive (or become entitled to) when you rent out your property. The rental income also includes rent or associated charges when renting out part or all of your home through the sharing economy or the renting of your holiday home.

Rental-related income

You must include rental bond money as income if you become entitled to retain it, for instance, because a tenant defaulted on the rent or damage to your rental property required repairs or maintenance.

If you received an insurance payout, there may be situations where the payout needs to be included as income, for example, if you received an insurance payment to compensate you for lost rent.

Associated payments include all amounts you receive or become entitled to as part of the normal, repetitive and recurrent activities through which you intend to generate profit from the use of your rental property. If you received a reimbursement or recoupment for deductible expenditure, you may have to include an amount as income. 

For example, if you received:

  • An amount from a tenant to cover the cost of repairing damage to some part of your rental property, and you can claim a deduction for the cost of the repairs, you need to include the whole amount in your income
  • A government rebate for the purchase of a depreciating asset, such as a solar hot-water system, you may need to include an amount in your income.

 

You must include any assessable amounts relating to limited recourse debt arrangements involving your rental property as rental income. If you’re unsure what to include in your tax turn – get in contact with us here.

Rental income regarding co-ownership of rental property

The way that rental income and expenses are divided between co-owners varies depending on whether the co‑owners are joint tenants, tenants in common, or there is a partnership carrying on a business of letting rental properties.

Dividing income and expenses according to legal interest

Co-owners not carrying on a business of letting rental properties must divide the income and expenses for the rental property in line with their legal interest in the property. If they own the property as:

  • Joint tenants, each hold an equal interest in the property
  • Tenants in common may hold unequal interests in the property; for example, one may hold a 20% interest and the other an 80% interest.

 

Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise.

Interest on money borrowed by only one of the co-owners, which is exclusively used to acquire that person’s interest in the rental property, does not need to be divided between all the co-owners. If you don’t know whether you hold your legal interest as a joint tenant or a tenant in common, read the title deed for the rental property. 

Co-owners of an investment property (not in business) 

A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a business of letting rental properties. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.

Partners carrying on a business of letting rental properties.

Most rental activities are a form of investment and do not amount to carrying on a business. However, where you are carrying on a business of letting rental properties in partnership with others, you must divide the net rental income or loss according to the partnership agreement. 

You must do this whether or not the legal interests in the rental properties are different to the partners’ entitlements to profits and losses under the partnership agreement. If you do not have a partnership agreement, you should divide your net rental income or loss between the partners equally.

If you’re looking for more investment property information – check out the other parts of ourTax Tips for Property Investorsseries or get in contact with us here for a personalised tax assessment or property portfolio review.

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