The earning of rental as a source of income could be common for many and it is important to take note of the income treatment as well as expenses that would qualify for deduction to avoid the risk of overpaying taxes. This article seeks to address some of the common questions for property owners, especially for individuals, considering that it is tax filing season in this month of April for individuals not having business sources.
In a straightforward manner, the rental income earned from your own property in which the maintenance and support services are provided by another party (e.g. property management companies) would be considered as non-business source.
1) What are the expenses allowed for deduction?
The expenses that are deductible include quit rent, assessment, interest on loan taken to finance the purchase of property rented out, fire insurance, expenses on repair, expenses to renew tenancy or to change tenant, rent collection fee and legal expenses to collect rental.
The initial expenses that include advertisement cost, legal fees to prepare the rental agreement, stamp duty, commission for property agent to identify tenants are not deductible.
In order to appropriately calculate the expenses allowed for deduction, the expenses incurred should be segregated accordingly based on the example of categories above.
2) What are the advantages of owning multiple properties?
It is possible that property owners may earn from one property but incur losses (expenses exceeding rental income) from another property. You may group all the rental income and expenses together and effectively offset the losses, if any, from one property against the profit of another property. In the event there are losses on an aggregate basis, such losses cannot be carried forward to the following year.
3) What if the property is vacant temporarily?
In the event the property is vacant for less than two years for reasons including repair or renovation of the building, legal injunction or other reasons beyond the control of the owner, then expenses incurred during that period are deductible even though no income is earned.
4) What if I receive rental in advance?
Rental received in advance will be taxable in the year it is received. Where there are expenses incurred in the subsequent year(s), an amendment to the earlier tax return where the advance rental was taxed is required.
