Are you renting out, selling an investment property or just about to sign on the dotted line? As accountants, we’ve seen thousands of dollars go down the drain because investors overlooked tax deductions they were eligible for—that’s a lot of takeaway flat whites!

Property tax

 

If you are a property investor, it’s vital that you have a tax agent who’s on your side and knows the ins and outs of property tax. You may ask yourself, but how much could I actually save? Well, the proof is in the pudding! Have a read of our considerations below and get back to us.

Capital Gains Tax

As you are probably aware, capital gains tax (CGT) is the tax on the profit you make from selling your investment property. Any property purchased after 27 March 2021 will be subject to a 10-year CGT threshold (5years if purchased before 27 March 2021). 

 

So, how much would your tax bill be if you sold your investment property before the CGT threshold is up? Compute the capital gain by deducting the price you paid for the property (including all fees that came with the purchase) from the price you sold it for, minus the fees. The capital gain is added to your annual income, so CGT is calculated based on your marginal tax rate, available tax deductions and profit you’ve made from the sale.

Main home exclusion

The good news is that you pay capital gains tax on the profit you’ve made from an investment property sale and not from main residences or primary homes. Your main home is excluded from the bright-line property rule if more than 50% of the area is used as a main home for the time required in the bright-line period. For example, if you use 40% of the property as your home and rent out 60% of it as an office, you cannot use the main home exclusion rule if you sell the property. Find out more about this here.

 

Temporary absence rule

If you move out of your main residence and maintain the property as your main home indefinitely, you can rent it out and it can still be treated as your main home. There is a “safe harbour” provision for this type of owner; however, it only allows owners to be away from their main home for a continuous period up to 365 days. If you’re a keen traveller, you need to ensure you keep tabs on the days you’re away from your home while it’s occupied by renters—it’s all good information to keep on hand if you’re thinking of selling.

Property re-valuation

If you rent out your main home and turn it into an investment property, you can have it re-valued beforehand. The capital gain must be the difference between the purchase price and the property value at the time you rented it out, not between the purchase price and the price you’ve paid for it. This can significantly reduce your capital gains tax liability.

Talk to a licensed valuer before you rent out your property, to avoid paying more tax than you need to! Give us a bell and we can link you up with the best in the business.

Capital gain timing

Top tip: If you know your income will be lower in the coming financial year, you can sit it out and hold off on selling the property until then so you can take advantage of a lower marginal tax rate and pay less CGT.

Investment property tax deductions

It’s good to look into future tax scenarios when planning to sell your investment property, but while you still have it, take the time to understand your rightful tax deductions as a rental property owner. We’ve jotted down a few expenses that can be deducted from your rental income (hopefully saving you a stash of cash):

–         Property insurance

–         Agent’s fees

–         Accounting fees

–         Repairs and maintenance

–         Mortgage fees

–         Valuation expenses

–         Legal action and eviction fees in case of unpaid rent

–         Mortgage Repayment Insurance

–         Depreciation on capital expenses

–         Travel expenses for property inspection

Note: The Government may remove the ability to deduct interest from 1 October 2021 for loans used to buy residential rental property unless newly built on or after 27 March 2021. Interest deductions are allowed for property purchased before 27 March 2021 but will be phased out in the next four income years.

Unfortunately, not all expenses are deductible! So, what can you not claim?

 

–         Capital expenses

–         The purchase price of your rental property

–         The principal of your mortgage repayments

–         Property improvement or addition costs

–         Repair or replacement costs, if it increases property value

–         Real estate agent fees

–         Depreciation on land and non-commercial buildings

–         Legal fees when selling (with exceptions)

Some lines are blurry, so talk to a tax agent to know whether the work done on the property is considered a repair or improvement.

These are just some of the tax tips we have on hand. For more, why not give us a buzz or flick us an email so we can jumpstart or take a good look at your property portfolio.

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