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Take advantage of our Free Tax on Investment Properties Guide

On top of the income from an investment property, there are other benefits such as tax deductions. You can claim costs related to the property, saving tax using negative gearing, and utilizing capital gains tax discounts.

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Tax deductions:

Generally speaking, the deductions are only available to the landlord when the property is tenanted or is available for rent. The following can be claimed as a part of tax deductions.

  • Advertising for tenants
  • Property Management Fees or Agent commission
  • Loan interest or on-going Administration Fees
  • Council rates
  • Land taxes
  • Strata fees
  • Building depreciation
  • Depreciation on fixtures and fittings such as air conditioner, carpet, dish washer, Oven, stove, etc.
  • Repair and maintenance
  • Pest control
  • Gardening
  • Travel costs related to inspection of the property
  • Stationery and phone costs related to management of the property
  • Accounting or Bookkeeping Fees

Please note that the above is not an exhaustive list of all deductions. Make sure that you consult with an Accountant or a Financial Planner to make sure that you don’t miss any deductions.

Tax Savings on Negative Gearing

Negative gearing refers to a situation where your rental income is not enough to cover the cost of owning the rental property. The loss you made on the rental can be used to offset your other incomes such as salary and wages.

Note: this tax loss does not necessarily mean a negative cash flow. For example, if you purchased an investment property costing $SOOK. Your cash outgoing would be $3000 per month including interest and management fees. Your rental income would be $3,000 as well. Therefore you are breaking even with the cash flow. However, once you factor in the depreciation of the property $12,500 (assuming the use of a straight line method), you have a tax loss and can use the $12,500 to offset your other income. If your annual income is $70,000, you would only need to pay tax on $57,500. 

Capital gains tax (CGT) on investment properties

When you sell an investment property, if the price is higher than your purchase price plus expenses, you need to pay capital gains tax. The capital gain will be added to your other income in the year you sold the property and taxed accordingly.

The cost base used to calculate the capital gain includes the price you paid for the property. Plus the buying and selling costs such as stamp duty, legal fees and agent’s selling commission.

If you have held the property for more than 12 months, you are entitled to a 50% discount on the capital gain tax. For an example based on a calculation that the capital gain is $50,000. And you have purchased the property more than 12 months ago. You only need to pay capital gain tax on $25,000.

Other important notes:

  • If you’re entitled to a tax refund for your investment property at the end of the tax year you can apply to the ATO to get your tax adjusted with your employer for each pay. Doing so you can receive more after-tax pay for each period. Refer to ATO website on PAYG Withholding Variation Application.
  • If you make a net profit from renting your property, you may need to make pay as you go (PAYG) instalments towards your expected tax liability.
  • If it is not rented or available for rent, it is still subject to CGT in the same way as a rental property. Since it does not generate any income, you can’t claim income tax deductions for the costs of owning the property. However, you may be able to include these costs to offset future capital gain when you sell the property.
  • Timing of repair and maintenance (R&M) work is critical if you want to claim the deductions in the same tax year. You cannot claim R&M in the year you paid them if they did not directly relate to wear and tear or other damage that occurred due to the renting out of your property. Therefore if you do R&M work right after you purchase the property and before generating rental income from it, you will not be able to claim a deduction in the year you paid the expenses.
Declaration: We hope this information will be useful to you. Remember, this article has been prepared without specific knowledge of your financial situation. Before making financial decisions or plans be sure to consult with an Accountant or a Financial Advisor.

Declaration: The Excel files and content of this website have been prepared without taking into account your personal financial situation or knowledge of your financial needs. Impact Taxation and Financial Services cannot be liable for any losses or damages arising from using the information provided. It is the user’s responsibility to seek independent advice from a professional accountant before implementing any financial plan.