Tax Considerations For Property Investors

If you invest in a rental property or rent out your current property, you’ll need to keep records right from the start, work out what expenses you can claim as deductions, and declare all your rental-related income in your tax return.

Any capital gain you make when selling or otherwise disposing of the property will be subject to capital gains tax (CGT) except in some circumstances where you rent out the home you’ve been living in.

If you have an investment property that is not rented or available for rent – such as a holiday home, hobby farm, or another dwelling you choose not to rent:

  • the property is subject to CGT in the same way as a rental property
  • you generally can’t claim income tax deductions for the costs of owning the property because it doesn’t generate rental income
  • you may be able to include your costs of ownership in the property’s cost base, which would reduce any capital gains tax liability when you sell it.

Investments should always be selected on the basis of the returns generated and how well the investment will help you meet your individual goals. However property investors can tap into some very useful tax benefits. These include the ability to claim a tax deduction for many of the costs of owning a rental property; the tax savings of negative gearing; and the availability of capital gains tax discounts.

Let’s take a closer look at how each of these tax benefits can work for investors.

Tax Deductions

As a landlord you can normally claim a tax deduction for a wide range of the expenses related to your rental property including interest on the loan. It should be noted that these expenses can usually only be claimed if the property is tenanted or available for rent.

Your tax adviser can give you a clear picture of what you can claim for your personal circumstances. Though in general the following expenses can normally be claimed on tax:

  • Advertising for tenants and property management fees.
  • Loan interest and ongoing loan fees.
  • Council rates, land tax and strata fees.
  • Building depreciation plus depreciation of fittings and fixtures like stoves, carpets and hot water heaters.
  • Repairs, maintenance, pest control and gardening.
  • Building and landlord insurance.
  • Stationery, phone costs and any travel to inspect the property.
  • Accounting or bookkeeping fees.

The above is not a full list of what you can claim. Always get proper advice from a tax expert before putting in your return.

Negative Gearing

‘Negative gearing’ refers to the situation where the costs of owning your rental property exceed the rental income. The difference, which represents a loss, can normally be offset against your other income like salary and wages.

So, say your income is $60,000 a year but your property expenses are $15,000 a year, you’ll only need to pay income tax on $45,000.

This way you’ll pay less tax, but don’t be mistaken, it is still a loss that hopefully will be more than made up for by an increase in the property’s value over time. Do note capital expenses like the repayment of your loan principal or renovations that add value cannot be claimed as an ongoing tax deduction.

The main advantage of negative gearing is that it makes a rental property much more affordable as the tax savings can be substantial.

Investment properties don’t have to be negatively geared. If the rent outweighs the costs of owning the property, it is said to be ‘positively geared’ and you can expect to pay tax on the profit the property generates each year.

Capital Gains Tax

The time may come when you choose to sell your investment property, and if you make a profit on the sale you are said to have made a ‘capital gain’. This gain is taxable – the profit is added to your regular income in the year you made the sale, and the tax will be determined accordingly. However there are important capital gains tax concessions available to property investors.

Firstly, the cost base used to calculate the capital gain includes the price you paid for the property plus buying and selling costs like stamp duty, legal fees and agent’s selling commission. This helps to reduce the profit for tax purposes.

In addition, if you have held onto the property for over 12 months you are entitled to claim a 50% discount on the capital gain at tax time. Put simply, if you made a profit of $100,000 on the sale of the place but you have owned it for over one year, you will only pay tax on a profit of $50,000. This represents a significant saving of tax for investors and it offers a good incentive to own the property for the long term.

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