When you buy an investment property, you will be eligible for a number of tax benefits and deductions. However, your tax responsibilities will change and possibly become more complicated. In this article, we’ll go through what you need to know about tax ahead of purchasing or renting out your investment property.
You might have heard about these terms if you’ve ever looked at investing property, or even some other types of investments. When your property is positively geared, it essentially means that you have a positive cash flow with your rental income.
It means that your mortgage repayments and property expenses are covered by your rental income. This gives you a passive income, and can help investors to work less and retire sooner.
Alternatively, the extra income can enhance your lifestyle and allow you to invest in other ventures if desired. Bear in mind that your added income will require you to pay more tax.
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Negatively gearing refers to the opposite effect. If your investment property is negatively geared, it means that your combined loan repayments and property expenses are greater than your rental income.
However, because your losses will be tax deductible. Some investors strategically negatively gear their properties to maximise tax savings with the intention of selling their property at a capital gain in the future. This relies on the assumption that the property’s value will increase.
A negatively geared property will cost you more — at least in the short term. You’ll have to make sure you have enough funds to account for your losses. Choosing an investment strategy can be difficult, so it’s smart to talk to a financial advisor.
When you sell an asset, you’ll either make a capital gain or loss. Capital gains tax (CGT) refers to the tax you pay when you make a capital gain from selling an asset. For example, if you purchase an investment property for $500,000 and sell it 5 years later for $700,000, you’ll be required to pay capital gains tax on the $200,000 difference.
The CGT rate generally aligns with your marginal tax rate. CGT takes into account your property-related expenses, along with the original property purchase price to form your cost base.
You may be eligible for a 50% discount on the tax if you hold onto the property for over a year. Among some other exemptions, you won’t be charged CGT if you’re selling your primary place of residence (i.e. owner-occupied home).
Your capital gain or loss will need to be reported in your income tax return. It forms part of your assessable income and isn’t classed as a separate tax. Should you make a capital loss, you can use this to offset future capital gains, if applicable.
As mentioned earlier, there are a number of investment property-related expenses that may be tax deductible. Rules can change and everyone has different circumstances, so always check for up-to-date information regarding tax deductions. It may be beneficial to speak to a tax accountant, particularly for more complex or unusual scenarios.
Here are some of the most common investment property tax deductions:
1. Investment home loan interest
One of the biggest tax deductions available to property investors is the interest charged on their investment home loan. You’ll also be able to deduct any loan fees. Just because interest is tax deductible, it doesn’t mean you shouldn’t still prioritise a low interest rate.
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Any costs associated with advertising the property for tenants are tax deductible. This includes agency fees and photography.
3. Maintenance and repairs
As a landlord, you have a legal obligation to keep the property safe and well maintained. This includes safely installing and maintaining landlord-owned appliances, fixing health issues such as mould or damp, and ensuring the structure is sound.
You can claim tax deductions on repairs (e.g. replacing a shattered window) and maintenance (e.g. cleaning a swimming pool). You may also be able to claim some deductions on improvements and capital works.
4. Legal fees
You are able to claim some legal expenses as tax deductions, such as:
However, you won’t be able to claim legal expenses such as solicitor’s fees when purchasing the property or organising the home loan. These are classified as capital and borrowing expenses.
5. Garden maintenance
While you may be able to organise an agreement within your rental contract for the tenant to take care of garden maintenance, this isn’t always possible. You can claim the cost for general garden upkeep, such as lawn mowing.
6. Agency fees and property management
If you hire an agent or property manager to take care of rent collection and tenant issues, these fees will be tax deductible.
7. Council rates and strata fees
You can claim council rates for periods when the property was rented out. Any strata fees are also tax deductible.
8. Building and appliance depreciation
Property investors may be able to claim building depreciation, depending on when the property was constructed. The appliances you install will inevitably decrease in value. This depreciation can be claimed under certain criteria.
Other possible tax deductions may include:
For further details, check out the Australian Tax Office website.
Many prospective property investors are under the impression that any improvements or renovations they make on the property are tax deductible. This isn’t the case, at least not initially.
If you do some serious garden landscaping that adds value to your property, this improvement must depreciate over the years before it can be considered tax deductible. Always get informed advice from the ATO or tax accountant if you aren’t certain.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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