Property can be an incredibly tax-effective investment strategy, if you’re armed with the right information.
Australia has a unique love affair with property as an investment class. Not only is bricks and mortar seen as a safe investment, but Australia’s tax code means property investors can see enormous benefits at tax time. To make sure you’re getting the most out of your investment property, it’s important to understand the tax benefits available to investors.
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Deductions you can take
There are a number of immediate deductions available to property investors, as well as items that can be depreciated over the life of the home. Australia’s taxation system offers generous concessions to investors and allows them to deduct the following:
Home loan interest
The interest on a property investment loan is fully tax deductible. For this reason, many investors choose interest-only home loans. These loans allow investors to pay only the interest portion of the loan without making payments on the principal. This maximises investors’ tax deductible debt.
In addition to the interest on an investment loan, any accompanying bank charges are also deductible.
Insurance
Any home and contents insurance, landlord’s insurance or other insurance related to the investment property is deductible.
Property repairs and maintenance
Investors can deduct any ongoing repairs and maintenance of their investment property. Maintenance is any work carried out to prevent or fix deterioration, and can include things like gardening, plumbing or pest control.
Repairs are any works carried out to restore part of the property to its original state of function.
A word about repairs versus improvements
While repairs can be deducted during the tax year in which they occur, improvements to a property cannot. An improvement differs from a repair in that, while a repair restores an item to its original condition, an improvement alters the original condition. For more read our guide about repairs versus improvements.
Costs to rent your property
Property investors can deduct costs pertaining to offering their property for rent. This includes any agent fees, ongoing property management fees and administrative costs. You can also deduct any outlay for advertising your property and travelling to and from the property.
Taxes
Land taxes and council taxes are fully deductible.
Depreciation
In addition to expenses you can deduct for the tax year in which they occur, property investors can also depreciate assets within a property that decline in value over time. These include things like appliances, carpets, curtains and furniture. However, these must be items purchased by you rather than a previous owner.
Investors can also depreciate building construction costs for things such as major renovations or additions.
Read our guide on property depreciation
Negative gearing
Negative gearing is one of the most attractive tax benefits for property investors. The policy is a tax minimisation strategy that allows investors to deduct losses on their rental property from their personal income.
The idea behind negative gearing is to offset cash flow losses in the short term with an eye toward long-term capital gains. This doesn’t mean, however, that negatively geared property investors have to be out-of-pocket at the end of the tax year. With depreciation factored in, a property can be cashflow positive but still be negatively geared. Read our guide for an example of how you can negatively gear a property, but still generate cash flow.
Capital gains tax
Capital gains tax, or CGT, is tax paid on the sale of any asset on which you’ve made a profit. While CGT will only affect your tax bill when the property is sold, it’s helpful to understand how CGT is calculated so you can minimise your bill when you do decide to sell.
CGT on an investment property is calculated based on the sale price of the property minus what’s known as your cost base. The cost base of the property is the original purchase price, plus any expenses. Expenses for CGT purchases include the following:
Ownership costs
Ownership costs include things like:
- Repairs and maintenance
- Council rates
- Home loan interest
- Land taxes
- Insurance
Improvement costs
These include any capital works you’ve undertaken on the property.
Title costs
Title costs are any fees associated with organising the title on your property.
Incidental costs
These include legal fees, agent fees, advertising and marketing fees, and stamp duty.
In order to minimise the amount you pay in CGT, it’s important to keep very detailed records of all expenses related to your investment property. To see how to best minimise your CGT bill, read our guide to CGT on property.
If you’ve held the investment property longer than 12 months, you will be eligible for a 50% discount on the capital gains tax.
I went to overseas and rented out my residential property in year 2007, and I came back and live in year 2015. If I want to sell this property, can you please tell me how I should calculate the capital gain taxes.
Hi Sarahly,
Thank you for your question and for contacting finder.com.au we are a financial comparison website and general information service we are not mortgage specialists so can only offer general advice.
The capital gains tax (CGT) is generally determined on how long you were living in your previous main residence and, if applicable, how long the residence was rented out for. If you are no longer treating your previous home as your main residence, then the CGT will be based on the valuation of the home when you first lived there, or you first began to rent it out. We’d recommend that you speak with an accountant to learn more.
Cheers,
May
Thanks May,
thank you so much for your reply. I was an non-resident for tax purpose from year 2007 to year 2015, and I rented out my residential property. I returned Australia in year 2015, and become a resident, and live in my residential home.
Can you please tell me if I am entitle to have the 50% capital gains tax discount for the rented period during my living aboard in overseas from year 2007 to year 2015.
Hi Sarahly,
Thanks for getting back and sorry for the delay.
If your intention was to rent it out, but you have changed your mind and lived in it, in that case, basically, the CGT you have to pay will be computed based on comparing the number of days you lived in the property to the number of days you rented the property. For the computation and for a more comprehensive advice whether you will be eligible for the partial CGT or not, best to reach out a tax accountant.
Regards,
May