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Investment Property Tax Tips

Australian legislation offers key tax advantages to those investing in real estate, but when it comes time to sell don’t forget the impact of capital gains tax.

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.

Negative gearing investment property

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.

Calculating your investment property’s tax deductions

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:

  • The costs of acquiring or selling the investment property
  • Any expenses relating to your personal use of the investment property
  • Any utility expenses paid for by tenants
  • Any associated borrowing costs based on the equity of the investment property that relate to private use, for example purchasing or renovating your home.

Expense claims you can make include:

  • Mortgage interest rate charges and bank fees
  • Council rates, water rates and land tax
  • Cleaning, pest control, gardening, repair and maintenance costs
  • Insurance, strata fees and capital works
  • Advertising for tenants and agent management fees
  • Travel undertaken to inspect or maintain the property
  • Loan interest charges and fees relating to the finance of a depreciable asset for the rental property or renovation of the real estate
  • The depreciation on assets as they devalue over time (for example stoves, air conditioning units, hot water systems and fans).

Capital gains tax on investment property

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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