There are three main tax considerations to be aware of when buying, owning and selling an investment property.
Tax deductions
You may be able to claim expenses related to your property for the period your property is rented, or available for rent. The following are typical expenses that can be claimed. You should get taxation advice before submitting any claim as part of your tax return.
- Advertising for tenants
- Agents’ fees and commissions
- Interest payments and loan fees
- Council rates, land tax and strata fees
- Depreciation of items such as stoves, fridges and furniture, hot water system
- Repairs, maintenance, pest control and gardening
- Building and landlords insurance
- Stationery, phone costs and any travel to inspect the property.
Negative gearing
This is when the annual costs of your investment are more than the rental return. When this happens, the government may allow you to deduct the costs of your property from your gross income. These costs could include your home loan interest, maintenance or repair costs and capital depreciation. Negative gearing produces a "book loss" which you can offset against your other income, reducing the tax you pay.
Say your rental income is $10,000 but your costs are $20,000. This means you make a loss for the period of $10,000. This loss can be offset against other income the owner of the property earns. Hopefully that loss will be made up by an appreciation in the value of the property over time, but that is not guaranteed. This can be beneficial if you are on a higher marginal tax rate.
But there are risks. You need to be able to manage if your property loses value or if interest rates rise.
Capital Gains Tax
This is a tax you pay on any profit you make on the sale of the property. This tax is based on the difference between the cost of purchasing the property and the sum you receive when selling it. If you hold the property for more than 12 months and are an Australian resident for tax purposes, you can reduce your capital gain by 50%.
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