For millions of rental property owners, COVID-19 has caused immense financial stress. With rents taking a hit, many expenses staying the same and none of the government stimulus measures specifically targeted at investors, the crisis has caused a perfect storm of financial tumult. With tax time coming up, property investors now need to understand how this will flow through to their tax position.
Here is my list of the key questions property investors need answers to regarding how COVID-19 impacts their tax position.
My tenants have stopped paying rent or reduced their rent because their income has been hit by COVID-19. Does this impact the deductions I can claim on my rental property?
No it doesn’t. The ATO has confirmed that if your rental income from tenants is impacted by COVID-19, you will still be able to claim all your expenses in full in relation to that property, to the extent you continue to incur them. For example, if you are still paying your mortgage in full, you can continue to claim the interest on your mortgage payments as a tax deduction.
Similarly, if you choose to reduce the rent on your property, either to assist current tenants or to attract new ones, that won’t impact your ability to deduct rental expenses either. Adjusting your rent downwards is either an act of goodwill on your part, or a reaction to changed market conditions causing you to adjust rent to maximize your return in a difficult economic period.
If my tenants reduce their rental payments now but later make a back payment of rent to catch up on their arrears, is this taxable and when?
Yes it is taxable. These amounts should be declared as income in the tax year in which you receive them. That could change your overall tax position. For instance, your rental income in 2019-20 could be reduced by the tenant paying less now but your rental income for 2020-21 could be increased if they make a large “catch-up” payment in the next tax year to clear their arrears. Even though the back-payment technically relates to unpaid 2019-20 rent, it is taxable when actually received.
My bank has deferred my loan repayments for six months as a result of COVID-19 but is still charging interest payments to my account, which is accumulating over the six-month period. Can I still claim interest on the loan now as a deduction?
Yes. If interest continues to accumulate on your loan, even though the bank not currently taking repayments from you, the interest will still be an expense that you have incurred and can be deducted in this year’s tax return as normal. Interest is still deductible on the loan even if the bank defers the repayments.
Can I claim the $150,000 instant asset write-off for assets I’ve purchased for my property?
No. Property investors cannot access the instant asset write-off. This is available only to businesses. Even if you have multiple investment properties, the ATO is unlikely to accept that you run a business of property investment.
I own a holiday property on the coast that I rent out through Stayz. COVID-19 is adversely affecting demand, including cancellation of existing bookings. I am unable to rent out the property for the short term bookings I normally make. Can I still deduct expenses associated with this property in the same way that I did before COVID-19 adversely impacted demand?
Generally, yes. If the reason for the adverse effect on demand for your property is because of COVID-19 (or even the bushfires before this), you can still deduct expenses associated with your property in the same proportion as you were entitled to deduct before COVID-19.
The deductions you can claim could be reduced however if:
- You decide to live in the property yourself during the crisis
- You let friends or family use the property for no rent or reduced rent
- You’ve taken the decision to take the property off the rental market once the restrictions end
Generally, you can only claim deductions for a period the property is “available for rent”. This means the property must be actively advertised for rent. The ATO accepts that in the current crisis, it may be wasteful to continue to pay for advertising on sites like Stayz and Airbnb when realistically, there is no chance of people renting your property. They have said that they will not seek to disallow deductions merely because you have been forced to temporarily cease actively marketing the property by COVID-19 (or bushfires).
Question: I’ve decided to live in my rental property for the duration of the crisis as it is in more isolated location, which means my family will be safer. Can I still claim deductions for the property for this period?
No. If you are using the property yourself, you cannot claim deductions in relation to that period of personal use.
