|
Investing in property can be a great way to build wealth over time. However, it’s important to understand the tax implications of owning an investment property. The tax requirements for an investment property are different to an owner-occupied property.
A key term you will come across often when dealing with tax for property investors is negative gearing. This describes when expenses (such as mortgage interest payments) associated with a property are more than the income (i.e. rent) earned from the property.
In Australian tax law, individuals who are negatively geared can deduct their loss against other income, such as wages and investment dividends. Property investors can use it to their advantage.
Income tax
The Australian Tax Office (ATO) requires that any rental income you earn forms part of your taxable income. This includes both long- and short-term rentals (such as holiday homes).
If you are using a property manager or leasing agent whose fee is paid out of your rental income, you must declare the full amount before deductions when submitting your income information.
If your property is negatively geared (running at a loss) you can deduct that loss from the income you generate.
Tax deductions
There are a number of expenses that you can claim as deductions against your rental income. These can include:
* Interest on your home loan: You can claim all interest paid on your mortgage as a tax deduction. This can also include offset account fees and withdrawal fees for redraw facilities.
* Repairs and maintenance: Maintenance done to preserve the liveable condition of the property, such as plumbing or electrical work, can be claimed. (To be considered for tax purposes, the repairs must have fixed any damage by restoring the item or feature to its original condition. This is to prevent people disguising enhancements as repairs.)
* Cleaning: You can claim for any cleaning, garden work, lawn mowing and pest control.
* Depreciation: The building structure and assets within it will depreciate over time. You may be able to claim depreciation for improvements you've made, such as renovations or the purchase of new appliances, as well as for assets that were already present when you bought the property. You will likely require a quantity surveyor to devise a depreciation schedule that indicates the deductions available over the life of the property.
* Insurance: This includes building, contents, public liability and loss of rent.
* Land tax: This is an annual tax levied on property you own that is above the land tax threshold. This threshold differs from state to state.
Capital gains tax (CGT)
CGT is the tax you pay when you sell your investment property. According to the ATO, if you make a profit on the sale of your property, that profit is considered a capital gain and must be declared on your income tax return. If you make a loss on the sale of your investment property, you will not be required to pay CGT.
The amount of CGT you will owe depends on the length of time you have owned the property. If you have owned the property for longer than 12 months, you will be entitled to a 50% discount on CGT.
Tax tips for property investors
-
Keep a good record of all income and expenses.
-
Use a depreciation schedule to calculate depreciation deductions.
-
Consider timing your renovations, improvements and property sales well to maximise tax benefits.
-
Get professional tax advice to make sure you are complying with tax laws.
|
