The end of financial year is fast-approaching and it will soon be time to gather up your paperwork for your tax agent. It’s also an opportune time to review your landlord insurance cover.
If you’re one of the 2.1 million taxpayers with an investment property, chances are you’ll soon be digging out your landlord insurance policy to complete your tax return.
According to the ATO, those 2.1 million taxpayers will claim $47.4 billion in deductions against $44.1 billion in reported income. And nine out of 10 tax returns will contain errors – a 2019 audit of rental property claims has revealed. Leaving out rental income and over-claiming deductions were common.
The statistics prompted a compliance blitz and the ATO website has information for property investors that sets out what income must be declared and what expenses may be deductible. There are some expenses that may be deductible immediately (management, maintenance and interest costs), while others need to be deducted over several years (borrowing, depreciation and capital works costs).
When it comes to landlord insurance, you can generally claim the cost of the premium as a tax deduction. It is also important to note that if you received an insurance pay-out, such as compensation for property damage or lost rent, you may need to declare this as income.
While you have your insurance paperwork out, it is a good idea to take a few minutes to review your policy to make sure you still have the right cover. We help with this below…
The first thing to consider is whether you have the right sort of policy.
If you have a rental property, it is suggested you have specialist landlord insurance. This is because standard homes and contents policies are not designed to cover all the risks investors face when renting out a property, like tenant-related damage or loss of rent.
Next, you need to bear in mind that there are different types of landlord insurance policies to suit different letting situations. For example there are policies for:
- Building and contents (suitable for detached houses),
- Contents only (strata properties), and
- Short-term rentals (including Airbnb).
Whatever product you choose will offer different amounts of protection against a range of insured events, tenant-related losses and legal liability. There are also policies which only cover insured events like fire and flood, and legal liability, but not tenant-related losses.
There are a bunch of other things that can impact the type of cover you choose for your investment:
- Switching from a fixed-term lease to short-term rental (including Airbnb) may require the type of landlord insurance policy to be switched.
- If the property is now rented as share or student accommodation, multiple lease agreements may impact the insurance.
- If you have allowed your tenant to sub-let, you need to talk to your insurer as sub-letting is generally excluded from landlord insurance cover.
- If your tenant operates a business from the premises, that is also likely to void an existing landlord insurance policy and alternative cover may be required.
- If your property is no longer for rent, for example you have decided to move in, or you are leaving it vacant or renovating, then you will usually need to look at alternative insurance as landlord cover may no longer be suitable.
We know choosing cover can be confusing, so if you are unsure if you have the right protection, you should chat to your landlord insurance provider and review your options.
Once you have determined the most appropriate type of landlord insurance to suit your letting scenario, you should check that the sums insured are adequate.
The sums insured should include the cost of rebuilding your property today, based on the same standard of finish and with the same features. Re-build costs also need to take into account current building standards.
TIP: building standards have changed substantially in the past 10 years with requirements for natural disaster resilience, such as bushfire ratings and flood mitigation measures, which has seen costs escalate. Keep this in mind when working out the value of your investment.
In addition, you need to consider if there have been any capital improvements – renovations, alterations, modifications or extensions – to the property which have affected its value. If you have upgraded or replaced fittings and fixtures, the new replacement costs should be calculated. If you have installed security (e.g. deadlocks or alarm systems), chat to your insurer about whether this could lower your premium.
When it comes to contents, sums insured should reflect the replacement costs of those items on a new-for-old basis. If you have upgraded, replaced or added additional contents (these are items owned by you and not your tenant), the current replacement cost needs to be calculated to ensure you have enough contents coverage. It’s also important to make sure any high-value or specialised contents at the property are specified on the insurance schedule. You may also require a separate policy for these items.
Take the opportunity now to review your cover and you’ll have time to make any adjustments to your policy requirements before 1 July arrives.
*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are there, contact 1800 961 017 if you have any questions.
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