Many property investors are still clueless about the true cost of owning additional properties, judging by the growing number of landlords who have been asked to task by the taxman over their rental income.

These owners were caught either for not reporting rental income at all, or for probably thinking that investing in property is a great deal as long as the rent from leasing out their units was more than enough to fund the mortgage payments. But what they do not realise is that, like with any other investment, dabbling in real estate comes with inherent risks – especially if the investors have not considered all the possible costs that can erode their rental income.

Common wrongdoings found include under-declaring rental income, over-claiming maintenance expenses, and the more serious breach of failing to report their rental income altogether. Some erroneously did not report their rental income because they mistakenly thought that paying property taxes, which have recently been hiked, meant they did not have to report their rental income separately.

Rental income is taxed based on your share of the property, and you should think twice before tampering with this rule just to pay less tax. High-income earners may think it is a good idea to let a retired relative hold 99 per cent of the property so that they only need to submit rental income based on their tiny share.

While doing so may help you save on tax, it can also cause you to lose the entire property if the co-owner refuses to recognise your beneficial interest. Even if you can produce documents to prove that you own the whole property, you will face the more serious consequences of using a sham arrangement to evade tax – which is an offence that carries hefty penalties and even jail time.

As IRAS is given wide powers to deal with tax offenders, it pays to play by the rules and pay your due taxes.

Even if you end up with no extra money after using your rental revenue to pay off all relevant costs such as mortgage interest, property taxes, and maintenance, you still need to report what you have collected and paid.

Doing so may help set the record straight, especially if your pre-filled information is based on your previous year’s income. Your rental loss will not lower the taxes on your employment income, neither can it be carried forward to the following year to reduce your future rental income. But rent losses can help you lower your overall rental income if you have other rental properties.

It is every landlord’s dream to have a property that is tenanted forever, but the reality is that your unit could end up being vacant for months. Whether you will receive some concessions from IRAS on the vacant months will depend on your actions as the landlord.

For instance, if your last tenant leaves in March and you choose to use the three months to spruce up and paint your unit to increase its rental value, you will be able to deduct the full year of property tax, plus mortgage interest and other relevant expenses such as maintenance costs, because the vacancy period is viewed as part of your normal rental cycle.

However, if you decide to take a non-urgent approach – say, choosing not to rent out your unit because you want to house visiting friends and relatives in the unit for the rest of the year for free – you still need to report your rental income for the tenanted months and can deduct only your bank charges, property tax, plus other relevant expenses on a pro-rated basis for those months.

If you have three bedrooms in your home and choose to rent out one of them, you need to report its rental income. Say the rent is $2,000 a month and your total relevant expenses plus property tax for your home come up to $9,000, while your mortgage interest comes to about $12,000.

In this case, your total rental income is $24,000, but you can deduct a third of both expenses – or $7,000 from the total. This means your net rental income for the year is only $17,000. The key point is that you can only claim a proportionate share of expenses that corresponds to the portion of the property being rented out.

It makes sense for landlords to use the 15 per cent deemed expenses concession from IRAS because it saves the trouble of keeping records of relevant expenses plus property tax. In some cases, you may even benefit from the 15 per cent deduction, which does not include the bank interest.

Using the $2,000 room rental scenario, if the 15 per cent deduction is used, you will report a net rental income of only $16,400 – or $600 less before deemed expenses become $3,600, or $600 more than your actual pro-rated expenses. You can still claim the pro-rated bank interest, which is $4,000.

The lesson here is that it pays for landlords to know all the rental rules so they can reap the benefits of their investments without any worry of getting into trouble with the taxman.

For the convenience of landlords, their rental income is pre-filled based on information reported in the previous year from the e-stamping records of their lease agreements. Despite this, it is incumbent on them to verify that their rental income details are correct. If there is an increase in rental income relative to that reported in the previous year, they should ensure that they revise their rental income details based on the actual rent received.

If they fail to do so when their income has increased, they can be taken to task for under-reporting their income and have penalties imposed. It is important for landlords to keep all relevant records for at least five years so that they can clarify the numbers should their cases be called up for discrepancies.

For those claiming deemed rental expenses, they need only keep the supporting documents related to the mortgage interests for five years. Finally, do not even think of secretly renting out your investment property based on verbal agreements with your tenants so as to avoid submitting documents to the authorities – IRAS will track down those who are not declaring rental income, and the penalties can be severe.