Tax deductions you can claim on your investment property
Investment properties (or properties used for income-producing purposes) have unique tax deductions that you can use to ...
There’s one aspect of property investing that you really need to get your head around when you become a landlord, and that is taxes.
Blogger: Philippe Brach, CEO, Multifocus Properties and Finance
It may sound boring, but in this respect the truth is: what you don’t know can bite you in the back pocket and take a huge chunk out of your profits.
From the second you sign a contract to buy a property, you will be introduced to a world of taxes that seemingly never end, including stamp/transfer duty, land tax and capital gains tax (CGT).
It’s important to view tax as being part of the cost of doing business as an investor; if you agonise over the payments, you’ll just cause yourself stress.
It’s also important that you have an understanding of the rules that surround certain tax situations. For instance, CGT can be a complicated beast, so here are a few things you need to know:
1. It always pays to hold your asset for 12 months
I don’t like using blanket statements like ‘always’ but in this case, I feel like it’s appropriate. Why? Because if you hold your property asset for at least 12 months, you’ll get a massive 50 per cent discount on the amount of CGT you owe.
As a very basic example, if you were to make a $50,000 profit on a property deal, you would pay tax of between $8,060 and $24,500, depending on your annual income and current tax rate (inclusive of Medicare/budget repair levies).
By holding the asset for just 12 months, you can slice that tax bill in half – saving you literally thousands of dollars.
Now, there are investors or speculators in property who use a ‘reno and flip’ strategy, which means turning around a property in a short time frame. Their profits can be substantially eroded simply because they sell the property before 12 months have passed. In my view, this is a wasted opportunity to basically access free money.
2. Contract dates are very important
When the Australian Tax Office (ATO) assesses your property transactions for CGT, it looks at contract dates, not settlement dates. If you sign a contract on 1 April but you don’t settle the property until 30 August, the ATO deems you to have owned it from 1 April.
You only have to hold the property until 1 April the following year to meet the 12-month eligibility requirement for the 50 per cent CGT discount – even though you’ve technically only owned the property for seven months.
3. Only a capital loss will offset a capital gain
Let’s say you sell a property and, for whatever reason, you make a loss of $25,000. You also earn $80,000 income.
Come tax time, people often assume they can offset that $25,000 loss against their regular salary income (reducing their taxable income in this case to $55,000). But unfortunately, you’re not allowed to deduct a CGT loss against your income.
Instead, you carry that loss over from one financial year to the next until you experience a capital gain. In other words, selling an asset (such as property or shares) for a profit is the only way you can financially offset against a capital loss.
4. There is only one way to avoid CGT: just don’t sell
Holding your property assets for the long term is the easiest and most effective way to avoid paying CGT.
Of course, sometimes this isn’t possible. Your needs change over time; that negatively geared property that helped you minimise your high tax bills five years ago may be chewing through your disposable income now that you’ve changed careers to a lower-paying role.
But before you make the decision to sell any property, make sure you review your overall investment strategy and reconsider your goals.