Understanding investment property tax can be complicated if you are a seasoned property investor or a first-time investment property buyer. Though you must pay rental income tax, you are also entitled to certain tax benefits.
This comprehensive blog helps you understand the tax implications of property investment and the deductions you can claim to reduce your holding costs.
1. When To Declare Your Investment Property In Your Tax Return?
If you obtain rent from your property, you must declare it as rental income when lodging your tax return with the ATO. You must pay tax on any rental income you receive.
The rule is applicable even if:
Your rental property is located overseas
You live in a part of the home
You rent out the property to friends or family under market rates
2. What Taxes Are Applicable On An Investment Property?
Before we discuss the tax liability on investment properties, let us first understand the type of taxes your investment property might attract:
Rental Income Tax
If your rental income is more than the deductible expenses linked to it, then your net rental income will be subject to income tax. The rental income tax payable depends on your tax bracket for the year.
Capital Gains Tax (CGT)
If you profit by selling your investment property, the profit (capital gain) on a sale is calculated and added to your tax return. The additional tax you must pay after adding capital gain on your tax return is called Capital Gains Tax on an investment property.
Note that you must pay Capital Gains tax on an investment property when selling your property at a profit and not when you make a capital loss.
Fortunately, the ATO allows exemptions and concessions for property investors from paying CGT based on how long they stayed in the property before selling it. If a property investor has owned the property for 12 months or more, he may be entitled to receive a 50% discount on his CGT.
Property Tax/Council Rates
Property tax is another tax you must pay on your property to fund local government initiatives such as garbage collection and general maintenance. The amount of tax payable differs based on the value and location of the property.
You have to pay land tax to the state and territory governments (excluding the Northern Territory) if you own an investment property and the total taxable worth of the land exceeds the land tax threshold.
The threshold and the tax amount payable differ by state or territory, ownership type, and land use. It is calculated based on the unaltered value of the land that doesn't consider buildings, paths, fences, and landscaping.
No land tax is payable if you live on the property. Your primary residence is exempt from land tax.
When buying real estate from a seller, you must pay Stamp duty to the state or territory government. Stamp duty charges depend on the following:
Location of the property
The value of the property
Are there any concessions applicable?
3. Types Of Tax Breaks On An Investment Property
According to the rules specified by ATO, property investors can claim investment expenses as tax deductions if they are used on areas of the investment property.
However, they can't claim deductions on things they don't pay for, such as utility or repairs done by the tenant.
Here are the main types of investment property tax deductions:
Rental Advertising Costs
If you advertise your property online, through brochures, print media, and signs to find tenants or re-let properties, you can claim such advertising expenses against your income. Make sure you claim for them in the same year you paid them.
You can claim the interest-charged investment property loan and any bank fees to service that loan. Let's understand it through an investment property tax deduction example.
Suppose you incur $20,000 of loan interest and $200 in loan fees; you can claim for both on your tax return. However, you can't claim your loan repayments on the principal sum and interest on the total loan size if you refinanced part of the loan for private purposes.
You can only claim this tax during the period in which you rent out the property.
If you own a rental property, you can claim the wear and tear of your property and its components as a deduction under "depreciation ."
To do this, you need to call a professional quantity surveyor to prepare a tax depreciation report that breaks down your available depreciation deductions for a property.
You can use land tax on your investment property as a deduction. As the charges vary between states, consult a tax advisor to ensure you claim the right amount in the year.
Repairs and Maintenance
You can claim the cost of repairing an appliance and repair professional's charges as an immediate deduction if they relate to wear and tear in the property.
If the landlord pays for the service, then he can claim the charges of a professional pest controller as an immediate deduction.
You can claim a 50% deduction on CGT when you hold onto the estate for over a year before selling it at a profit.
Landlords can claim the upkeep and maintenance of existing plants and structures as an immediate deduction.
Property owners can claim the cost of buying rental property insurance.
Landlords can claim the cost of an accountant's advice, tax return preparation, and expense incurred for rental accounts management in the same year of incurring the charges.
Property Agent's Commission/Fees
Landlords can claim the fee or commission they pay to agents for rent collection, finding tenants, and rental maintenance.
You can also claim the costs for legal advice and documents concerning rental activities.
4. How Are Investment Properties Taxed In Australia?
According to the Australian Tax Office, you may make a capital gain (CG) or capital loss (CL) when you sell a rental property.
CG/Cl - Property buying price and improvement costs - the property sale amount.
If you incur a:
Net CG in an income year, you will have to pay for capital gains tax
You can carry Net CL in subsequent years and deduct it from your CG later.
If you co-own an investment property, you will make a CG or CL based on your ownership interest.
You can claim Capital expenses to lower the amount of CGT. Some of these include the following:
Conveyancing costs you pay to a conveyancer
Valuation fees if it is a private valuable performed by a solicitor
Title search fees
Stamp duty on the property transfer.
The ATO provides an investment property tax calculator you can use to calculate your CGT.
5. How Can I Avoid Paying Taxes On Rental Property?
According to ATO, a property investor may be entitled to a partial; or total main residence exemption if:
He lives in the property before he gives it on rent
He rented out a portion of his home
6. How Long Do I Have To Live In My Investment Property To Avoid CGT In Australia?
If you buy a property intending to rent it out, you will have to pay CGT when you sell it at a profit. According to ATO, investment property capital gains tax can reduce under specific conditions.
Suppose you have held property in your name for at least 12 months or more (excluding the acquisition date and subsequent sale). In that case, you can get a 50% discount on the capital gain you make.
7. How Does Investment Property Reduce Tax?
If you are interested in property investment and want to know what are the benefits of owning an investment property, check this section to learn the tax benefits you can avail of from your investment property:
Interest Payments and Holding Costs
You may claim a wide range of costs on your rented property as tax deductions. These include interest payments, maintenance, makeovers, council rates, land tax, insurance, and property management fees.
Ensure you keep invoices of the expenses on the property to claim at tax time.
The appliances you buy for your rental property may decline in value with time. It is called depreciation. You can claim depreciation on assets used at the rental property over the life of that asset.
You can also claim the cost of capital works such as construction and refurbishment at your rental property. Such deductions are usually spread over a 25 to 40-year period.
Suppose your rental income is less than the costs incurred on its maintenance. In that case, you are incurring an overall loss on the investment. You can use that loss to counterbalance your other income sources and reduce your taxable amount.
8. Is It Worth Buying An Investment Property In Australia?
Tax benefits are undoubtedly the main reason to buy an investment property. However, there are a few more benefits of real estate investing.
Check out our post on how to invest in real estate in Australia to learn the detailed benefits of buying an investment property.
9. How Much Tax Do You Pay On Rental Income In Australia?
Every property owner should know how to calculate their tax obligations. The ATO states the earnings on a partial or all of your property contribute to your assessable taxable income. You need to pay tax as per your marginal tax rate.
The below table shows how much tax I will pay on a rental property:
|Taxable Income||Tax On This Income|
0 – $18,200
|$18,201 – $45,000||19c for each $1 over $18,200|
|$45,001 - $120,000||$5,092 plus 32.5c for each $1 over $45,000|
|$120,001 – $180,000||$29,467 plus 37c for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45c for each $1 over $180,000|
Let us understand it from an investment property tax return example:
Suppose you earn a pre-tax salary of $75,000 from your job and the gross rent you receive on your investment is $25,000 per year.
Considering these, your taxable income would be $100,000 (before deductions).
Assuming no other income source, you would fall into the tax bracket of $45,001 to $120,000.
Therefore, your marginal tax rate would be 32.5%, and the tax payable for the year would be $22,967.
10. How To Avoid Capital Gains Tax On Investment Property In Australia?
The ATO permits property investors to minimise or altogether avoid paying Capital Gains Tax (CGT) when selling their investment property in specific circumstances.
Below we have listed these exemptions and concessions:
The Main Residence Exemption
If you own and occupy your property, then your property is considered your primary Residence in tax legislation.
As you won’t incur capital gain from living in your home, the ATO allows you to be exempt from paying CGT if you sell that property. However, you need to fulfil certain conditions to qualify for this exemption:
You must have lived in the property for the entire duration that you have owned it
You used to keep your possessions at that property
You use the property address to receive your paper mail
The utility accounts of the property are in your name
The CGT 6-Year Rule
This rule enables you to use your Main Residence as an investment by generating a rental income from it for up to six years.
So, like a homeowner, you can sell your property within six years without being liable to pay CGT.
The CGT 6-Month Rule
This rule is applicable if you have purchased a new home and couldn’t sell off your old property.
In this case, the ATO permits you to keep both properties as your Main Residence for up to six months. You can dispose of your old property without prompting CGT liability.
The 50% CGT Discount
It is another way to reduce the amount of CGT you pay significantly. If you have owned your investment property for 12 months or more before selling it, you can claim a 50% discount on your CGT.
11. What Is The 1% Rule For Investment Property?
The 1% rule is a guideline that real estate investors can use to determine how much monthly rent they can charge for potential rental properties.
According to the rule, multiplying the total investment that includes the property buying price and the repair cost by 1% will give you a number, or rent they should charge their tenants.
12. What Are The Disadvantages Of Investment Property?
Check our comprehensive post on how to invest in real estate in Australia to learn about the pros and cons of buying an investment property.
Tax payment is essential if you own an investment property.
Proper knowledge of these taxes and the various exemptions and deductions available will put you in a better position to handle tax issues.
Also, check the recent tax laws for your state or territory if you are considering investing, as they change from time to time. Speaking to a tax specialist to seek independent taxation and financial advice can help you save thousands of dollars.
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