Deduction of Irrecoverable Rent

If you are a property owner and derive rental income from it, you can claim deduction of irrecoverable rent. Only the amount of rent confirmed to be irrecoverable during the year is deductible. This article will tell you more about deduction of irrecoverable rent and illustrated by examples.

Definition of Irrecoverable Rent

For various reasons, the tenant may not be able to pay rent in time. Usually that is merely a delay in payment and the tenant will pay up the outstanding rent within a few months. In that event, the rent receivable should be included in the property tax assessment. You cannot claim a deduction for “irrecoverable rent” because rent is merely unpaid, and hence outstanding, but not “irrecoverable”.

Irrecoverable Rent is Deductible

Any claim for deduction of irrecoverable rent may be allowed in the year of assessment during which it is proved to the satisfaction of the Assessor that it has become irrecoverable.

Example 1

You let your property for rental income as shown below:

Since 1 October 2023 Mr C has failed to make rental payment in time. Rent payable for the 3 months from 1 January 2024 to 31 March 2024 was outstanding as at 30 June 2024. He vacated the premises on 1 July 2024 without paying up the rent for the 6 months from 1 January 2024 to 30 June 2024. All your attempts to recover the rent were unfruitful and you lost contact with him in September 2024.

Consequently, after a period of vacancy for 4 months, you let the unit to a new tenant, Ms L, on 1 November 2024. At all material times, you paid rates at $1,000 per quarter.

You should report your rental income and irrecoverable rent in the tax returns for 2023/24 and 2024/25 as follows:

• Year of assessment 2023/24

  	$
  Rental income ($20,000 x 12)	240,000
  Less: Rates paid by you as owner ($1,000 x 4)	4,000
  	236,000
  Less: 20% allowance for repairs and outgoings	47,200
  Net assessable value	188,800
  Property tax payable @ 15%	28,320

(Note: As Mr C still lived in your property, the rent for January to March 2024 was considered as rent receivables, not irrecoverable rent and thus was included as rental income for the year)

• Year of assessment 2024/25

  	$
  Rental income ($20,000 x 3 + 23,000 x 5)	175,000
  Less: Irrecoverable rent for 1 January 2024 – 30 June 2024	120,000
  Assessable value	55,000
  Less: Rates paid by you as owner ($1,000 x 4)	4,000
  	51,000
  Less: 20% allowance for repairs and outgoings	10,200
  Net assessable value	40,800
  Property tax payable @ 15%	6,120

Treatment of Irrecoverable Rent When It Exceeds the Rental Income of the Year

When irrecoverable rent is greater than the rental income, the excess will be deducted in the latest year of assessment in which the rental income is sufficient for the deduction.

Example 2

Facts as per Example 1, but the rent payable by Ms L is $5,000 per month:

• Year of assessment 2024/25

  	$
  Rental income ($20,000 x 3 + $5,000 x 5)	85,000
  Less: Irrecoverable rent	120,000
  Assessable value	NIL
  Property tax payable @ 15%	NIL

The excess of irrecoverable rent over your rental income should be deducted from the rental income of the preceding year, calculated as follows:

• Year of assessment 2023/24

  	$
  Rental income ($20,000 x 12)	240,000
  Less: Balance of irrecoverable rent ($120,000 - $85,000)	35,000
  Revised assessable value	205,000
  Less: Rates paid by you as owner ($1,000 x 4)	4,000
  	201,000
  Less: 20% allowance for repairs and outgoings	40,200
  Revised net assessable value	160,800
  Revised property tax payable @ 15%	24,120
  Tax to be refunded ($28,320 - $24,120)	4,200

However, if in future you recover any part of the “irrecoverable rent” deducted from these assessments, you must report the amount recovered as part of the rental income of the year of recovery.

How to Report Irrecoverable Rent When Recovered

You need to report the amount recovered as rental income for the year of recovery. The Assessor will also include the amount recovered in the assessable value of that year.