Tax for Property Investors
Property investors have the luxury of certain tax benefits; however as an investor you will also incur additional taxes. The following provides a breakdown of taxes related to property investment.
The following section should only be used as a guide. We recommend you contact your financial advisor for advice on matters related to your personal taxes.
Tax Incurred by an Investor
There are several taxes that property investors incur when acquiring and owning an investment property:
- Income Tax
You will be required to pay tax on income (rent and any other money) which you receive from your property. This may be offset however, by interest repayments on your loan as well as other deductions (refer to page 10 for more information).
- Capital Gains Tax (CGT)
Capital gains tax is required to be paid on any profit made from your investment property once sold.The applicable rate of CGT is the same as the income tax rate which you pay, however if you have owned the property for more than 12 months, you gain a 50 percent discount on the capital gain.
- Property Taxes
Sometimes referred to as council rates, this local tax typically funds local government investment and expenditure, such as rubbish collection, parks and public facility maintenance and other community services. The frequency and amount of tax will depend on the local municipality and the market value of your property.
- Land Tax
Land tax is imposed by all state and territory governments, excluding the Northern Territory. It is payable based on the combined unimproved value of the land you own and is calculated on what your land would be worth if it was vacant; therefore it does not include existing dwellings on the property. Land tax is payable on all property you own, except your principal place of residence. The amount of this annual payment will vary by locality. Contact your relevant state authority for more information.
The Deductions of an Investor
Property investors face three categories of expenses which they have the luxury of deducting from their tax:
- Acquisition and Maintenance Costs
You can offset expenses relating to your investment property against rental income; whether it was negatively geared or not. Some expenses which can be claimed are:
- Advertising costs to find tenants
- Bank fees and charges on your loan accounts
- Borrowing expenses
- Body corporate fees
- Cleaning costs
- Council rates
- Electricity and gas not paid by the tenant
- Insurance – building, landlord, etc.
- Interest on your investment loans
- Land tax
- Legal expenses
- Property manager fees and commissions
- Surveyors’ fees
- Repairs and maintenance
- Stationery and postage expenses
- Investment related telephone bills
- Tax-related expenses
- Travel and car expenses for rent collection or inspections
- Costs incurred for the inspection or maintenance of your property
- Water charges.
- Depreciation Allowances
All landlords who own an investment property are eligible to claim depreciation on newly purchased items. You can deduct depreciation on fixtures and fittings in the property, such as:
- Hot water system.
- Negative Gearing
Negative gearing occurs when the annual cost of your investment is greater than the return which you are receiving. In simple terms, when the ongoing costs such as maintenance and loan repayments are greater than rental income, then the property is negatively geared. If you are negatively geared, the government allows the loss on your property to be deducted from your gross income, creating a reduction in your tax liability.
Top Tip: Do not be fooled. Although you will pay less tax, this is still a loss – only slightly smaller, which in time will hopefully be made up for due to the property’s capital growth. The ideal outcome is to have a positive cash flow or a low level of negative gearing.