Rental expenses deductibility

Question from Stav updated on 17th July 2019:

I have recently purchased a property for the purpose of renting it out. I am clear on the deductibility of some expenses (namely, insurance, rates and interest) However, I am not clear if other expenses can be deducted. Specifically, these are: Trade Me (for rent) listings, property valuation for bank lending purposes, and legal fees associated with buying the property (approximately $2k). Can you please advise?

Our expert Mark Withers responded:

The old saying, "give a man a fish you feed him for a day, teach him to fish, you feed him for a lifetime" springs to mind. So rather than give you a list of deductibles let me share the principal of deductibility. The general permission of deductibility is what is referred to as the nexus test - ie: can a link be demonstrated between the cost and the income earned. If the cost is necessarily incurred to earn the rental income the first hurdle is jumped.

The second hurdle is known as the capital limitation. So if the expenditure is capital in nature, ie an improvement to the property, it will not be deductible. If the item of capital expenditure is not building though the capital expenditure may be depreciable. Loose chattel items within a rental property tend to be depreciable items. So with respect to your specific queries, yes, the valuation to enable the finance to be gained is deductible as without it no rent could be earned and with respect to legal fees, these typically are deductible when the quantum is less than $10000.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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