The tax advantages of investing in property, including negative gearing and rental property expense claims, make real estate an attractive investor avenue. These are particularly relevant for those wanting to reduce their overall taxable income. On the flip side, when it comes time to sell, any capital gain you earn on the property will be taxed.
This income loss on your rental property can be used to reduce your overall taxable income (which may include salary, business income or other income), hence decreasing your annual tax bill. If your overall income does not cover the loss, it can be factored into the following year’s tax return period.
To determine whether you have experienced an income loss or profit on your investment property you need to calculate the rental expenses you can claim at tax time. These deductions are outlined below, but for more information refer to the ATO’s guidelines onexpenses and depreciable assets or talk to your taxation specialist.
An interest-only loan makes sense if you are planning to use negative gearing for tax purposes. The interest on these loans is generally charged at a higher rate than standard fixed home loans, or are variable. Additionally, as you are not reducing the principal debt on the loan, the interest charged is less likely to go down unless interest rates drop.
When a property is positively geared you will pay tax on the net rental income earned. This will be factored into your overall annual taxable income.
The expenses you can claim as rental property tax deductions include those relating to your mortgage, ongoing management and maintenance costs, as well as depreciation on rental property assets. Make sure you keep expense receipts and make detailed records of any transactions relating to your investment property.
You cannot claim:
Expense claims you can make include:
If you make a capital gain when selling your investment property you must pay tax on the profit. To determine your capital gain or loss when selling investment real estate take the cost base (purchase price and capital expenses) away from the capital proceeds.
Importantly, the rate at which capital gains tax (CGT) is charged will be cut by 50 percent if you own the property for more than one year. Though CGT is not charged on the sale of your primary residence, be wary of renting your home out for a period of time or if your land is on more than two hectares, as CGT may then be payable. CGT is charged on the sale of holiday homes, empty land, business premises and rental properties.
You can offset your capital gain in a financial year with other capital losses experienced within the same period. Investors try to time capital gains and losses so they fall together in order to reduce their tax burden.
Capital gains tax is only applied to the sale of assets acquired after 20 September 1985, when the tax was introduced. However, capital gain or loss on certain capital improvements made to the property after this date may need to be declared.
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