When buying your investment property, it’s vital to keep costs and returns in mind. This perspective keeps property investment real and stops you from getting caught up in the savings hype. Let’s look at investment property tax from both sides of the coin, so that you can work out the costs and how much you could save.
There are many taxes that you’ll attract as a property investor as well as deductions that you’ll be able to make at the end of the fiscal year. Consequently, you need to weigh-up both to find out whether or not buying an investment property is justifiable.
Investment Property Tax Incurred
There are several taxes associated with your property investment. Some are tax deductible, while others are not. The following are the most prominent:
- Income Tax – Any rent or other monies collected as the property owner is declarable as taxable income.
- Capital Gains Tax (CGT) – When you sell your investment property, if you make a profit, then you would’ve made a capital gain. The gain made is taxable. Therefore, the profit made adds to your regular income in the year of the sale.
How is capital gains tax calculated?
- The sale price of your property.
- Less the purchase price and any buying, ownership and selling costs.
- If ownership is longer than 12-months, you’re entitled to a 50% gains discount.
- Your annual income in the year of sale.
Let’s look at an example.
You buy an investment property for $190,000 in 1998. In 2018, you sell this property for $490,000, and your current taxable income is $50,000. The cost to buy the property including stamp duty, tax advice and capital improvements was $47,000. Ownership costs were $126,468 and the costs of selling $23,000. Based on this, the capital gain made was $103,432. Subsequently, the tax payable under the new Capital Gains Regime of a marginal tax rate x half the capital gain is $24,582.
- Property Tax – Also known as council rates, this tax covers the cost of local government services such as community services and rubbish collection. The cost of this tax varies from council-to-council, so ask about rates when buying to avoid unexpected charges.
- Land Tax – All state governments charge land tax, excluding the Northern Territory. This tax varies depending on the state of property purchase and is payable only on the land value of the property; hence it excludes any dwellings or improvements. Also, this tax does not include your principal place of residence. To calculate costs of this tax, contact your tax adviser.
Investment Property Tax Deductions
A vast range of expenses that relate to your investment property are tax deductible, so keep sound records and all receipts. However, remember that you can only claim these if the property is an investment that you don’t live in, which is either currently tenanted or available as a rental.
Properties built or renovated to a tenant are exempt from the payment of GST. However, if you’re building to sell for a profit or looking to ‘flip’ the renovated property for profit, then you’re liable to pay GST on the sale; you will also have to pay capital gains tax.
In most cases, the general tax allowances for your property investment are straightforward. These are as follows:
What can I deduct?
- Tenant advertising costs – Paper, online and billboard.
- Property management fees – Real estate agent or self-managed costs.
- Any bank charges – Loan interest and ongoing loan fees.
- Local government fees – Annual council rates and the emergency services levy and land tax.
- Strata fees – Grounds maintenance and building insurance.
- Depreciation – The building structure, lighting fittings, appliances – dishwasher, fridge, and hot water service – blinds, carpet and flooring, and new additions such as a kitchen upgrade.
- Repairs and maintenance – Gardening, paint, plumbing and maintenance, as well as wear and tear.
- Insurance – Building and property owner coverage.
- Stationery – Receipt books, pens, printing, and paper, as well as phone costs.
- Bookkeeping and accounting – Record keeping and taxes.
- Legal fees – Conveyancer at the time of purchase.
- Utilities – Water, gas, and electricity installation, along with ongoing sewer fees.
- Travel – Costs associated with the inspection of the property.
While this is an extensive list of tax-deductible items, there may be more. Therefore, always consult your accountant before lodging your tax return.
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Negative Gearing and Your Investment Property
Negative gearing refers to the situation where the costs of owning an investment property are more than the rental income, resulting in a loss. In this case, the Government allows investors to claim their investment property expenses off their income before paying tax, thus paying less tax.
So, how does it work? Well, when an investor buys a property they incur expenses – loan interest, council fees, etc. – and they collect rent. As soon as the cost of owning the property becomes higher than the rental income collected, the property becomes negatively geared.
For example, let’s say you collect rent of $15,200 a year on your property, but your property expenses are $17,500 yearly. Consequently, this means that your property expenses become tax deductible. So, if you earn $52,000 in this financial year, then your taxable income becomes $34,500. So, you’ll incur tax on this amount.
How does negative gearing benefit me?
- Reduces your tax.
- Rental property becomes more affordable.
- Encourages you to build a portfolio.
What are the risks for me?
- You’ll have to cover some property expenses.
- Some payments, such as paying the loan principal are not tax deductible.
- You need good money management skills.
Not all investment properties are negatively geared. Some rental properties collect more rent than ownership costs making them positively geared. Once this occurs, the profit made on the property annually becomes a part of your taxable income.
So, if you’re purchasing your own investment property and need a property investment loan, contact eChoice and achieve your investment goals faster by speaking to a qualified mortgage broker who can help by gearing your property portfolio with the right investment loans. Our brokers have access to 100’s of products, so we can help you find a competitive mortgage to meet your individual needs.