Investment Property Tax

Once you have purchased a property for investment, any income or capital gain you make becomes assessable.  Similarly, most expenses relating to the investment are deductible allowances over time.  You need to consider the structure of your purchase, the way it is financed and the choice of purchasing entity. Investment property tax can occur during the lifetime of the asset (income tax) and also at the end when it is sold (capitals gains tax).

Below is a table that may be of assistance in understanding the likely treatment of the investment for taxation purposes:

Assessable for Taxation

Deductible Expenses

Rental (income tax)

Property Insurance

Accounting fees

Profit on sale (Capital Gains Tax)

Property Repairs

Body Corporate levies (if applicable)

 

Bank charges/ fees

Property Loan Interest costs

 

Council/Water rates

Cleaning and pest control

 

Property Depreciation

General related expenses

  Property agent fees Property land tax

Depreciation is the decrease in the value of an asset.  The depreciation ?value? of some assets contained in a property may be amortised and claimed as furniture and fittings for example air conditioningconditioning units, blinds, carpets, stove, hot water heaters, etc. Read more about depreciation and the tax impact in our guide on depreciation.

Furthermore, there may also be a provision to depreciate over a number of years the value of the building where the construction commenced after 17 July 1985.

Capital Gains Tax

The capital gain on the sale of an investment is subject to Capital Gains Tax (CGT).

CGT is generally only paid when you dispose of the asset.  Providing the investment has been held for at least 12 months, you should be eligible for the 50% Capital Gains Tax discount. Rules on how assets that are sold are taxed, can change so check with the ATO or your accountant for the latest updates.  The net capital gain from a property is typically added back to your personal income and then it is taxes at your magin rate of tax.

Given that CGT is assessed when you dispose of the property it is important that you create and maintain detailed records of your expenditure relating to the investment. For this reason many investors tend to hold property for very long periods of time to defer any capital gains tax that could arise post a sale of a property.

Working example of Capital Gains Tax

Assume you purchase a property in Sydney for $500,000 and then decide to sell it for $600,000. There two possible capital gains tax scenarios that can occur depending in whether you sell withing 12 months or after 12 months. If the property is held longer  than 12 months a 50% capital gains exemption typically is applied to the capital gain. See the table below as an illustration of the two scenarios. We have assumed a personal tax rate of 37% is applied.

 CGT Items

Sold within less than 12 months

Sold after 12 months 50% CGT Discount

Property Purchase Price

$500,000

$500,000

Capital works depreciation claimed (-)

$10,000

$10,000

Cost base amount

$490,000

$490,000

Selling price

$600,000

$600,000

Capital gain

$110,000

$110,000

50% CGT Discount

$0

$55,000

Taxable Capital gain Amount

$110,000

$55,000

Personal Tax  rate at 37%

$40,700

$20,350

Net profit after tax

$59,300

$79,650

The above table illustrates two very different results, there is a tax saving of $20,350 is the property was sold after 12 months. Notice how depreciation that is claimed is used to reduce the cost base and hence increase the taxable capital gain amount post sale.

 

Land Tax

Another type of investment property tax to consider is land tax. This is applicable when you accumulate land value up to a certain threshold, once you pass that threshold you are up for ongoing land tax each year for each dollar over that threshold.  The threshold is per state of Australia, so for example you don't get taxed on the land if you have a property in Sydney, Melbourne and Brisbane and each property individually is under the land threshold value. To see the current land tax thresholds for each state such as NSW, QLD, VIC, W.A and S.A refer the the land tax guide.

For further information always seek the advice of a registered and qualified tax agent or adviser when working out tax related matters.

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