Does money from a rental property count as income?

It’s an exciting time when you start making money from your first investment property. It can be a nice bit of padding to your household’s finances and is the start of your investment future.

Then the end of the financial year comes around and you start needing to think about tax. Many will be wondering if the money from a rental property does count as income and whether you need to declare it.

So, we’ve teamed up with the accounting team at LINK to break it down.

How is rental income taxed?

The Australian Taxation Office (ATO) places any rental income that you receive as a part of your total taxable income. It will then be taxed at your marginal tax rate for the year. So, this means if you earn $80,000 from your job and earned $10,000 from your rental property, you would have a total taxable income of $90,000.

What needs to be declared to the ATO?

There’s a variety of different rental properties and ways you receive income from them. You must declare income from all properties you own, including those owned overseas. This includes:

• Short term rentals, like holiday homes.
• Properties rented through sharing platforms like Airbnb.
• Renting out part or all of your home, such as renting out a room.
• Formal or domestic arrangements where you rent out to family or friends.

There’s also the income you can receive that goes beyond rent from a tenant. These payments include:

• Bond money that you retain.
• Letting and booking fees.
• Insurance payouts.
• Money you receive from a relief fund in the case of a disaster.
• Payments for deductible expenses. Like payments you receive from a tenant covering the cost of repairs.
• Lump sum payments of rental income.

All of this needs to be reported to the ATO.

What deductions can I claim?

As an investment property owner, you’re entitled to claim a variety of deductions relating to your property to offset the income you have received.
Examples of investment property deductions include:

• Property management expenses.
• Maintenance expenses.
• Water and council rates.
• Administration expenses.
• Property insurance
• Repairs.
• Interest on your loan.
• Quantity surveyor fees.
• Property investment seminars.
• Rental advertising costs.
• Strata fees.
• Building depreciation.
• Pest control.
• Garden maintenance.
• And more.

What if I made a loss?

If you made a loss that year it is important to still report it. That’s because you could potentially use negative gearing. Of course, before you do it’s always a good idea to talk to your accountant first to make sure it is right for you.

When talking about income from investments there is positive gearing and negative gearing. Both are important to understand when investing in property. So, let’s break them down.

What is positive gearing?

Positive gearing is whenever your rental income exceeds any expenses incurred for your property. Essentially it means that you’re in the green. It’s a positive cash flow, allowing you to create a passive income.  

This is great as it allows you to:

• Work less or retire early.
• Have more funds to funnel into other investments.
• Pay off your loans faster.
• Have more money to spend on the things you love.
• Increase your savings.

But, income generated here will increase your overall taxable income. Sometimes this could put you in a higher tax bracket. Have a chat with your accountant about strategies here.

What is negative gearing?

This is essentially the opposite of positive gearing. It’s when your income from your property is outweighed by your expenses. Negative gearing is typically (best) created through depreciation. Depreciation is the ability to claim part of the cost of the buildings in your tax return. Its good for tax purposes as it reduces your net rent (or triggers a negative gearing loss) without physically paying for the expense each year (like rates and insurance for example). Fortunately, you can turn any loss you incur into a tax deduction. Because of this, negative gearing is a strategy some investors use to reduce their overall taxable income.

What should you do next?

Since your tax returns are more complex with a rental property entering the equation, you should speak to an accountant. They will be able to complete your tax return and help you get the best possible outcome.

For more tips like these have a chat with Link Living.

Disclaimer: This is not advice. The information in this article is designed to provide general-purpose information. If you want specific advice, speak to an accountant or financial planner.