Tax implications of owning an investment property: an overview.
If you have an investment property, or are considering purchasing an investment property, it is important to consider a range of factors. We broadly discuss some of those factors below.
Please contact us if you would like any further information or assistance – we offer a range of services, including tax compliance and tax consultations.
Capital Gains Tax (CGT)
An investment property (or “rental property”) is not subject to the same CGT concessions as a primary place of residence. This means that when the property is sold, it will be subject to Capital Gains Tax.
Income Tax
The net rental income or loss (think “net profit”: income less expenses) that a property produces is added to the taxable income of the owner(s).
Positive gearing:
- Where a property’s rental income exceeds its expenses, the amount is added to the owner(s) taxable income, and tax will be paid on that income at the respective rate.
Negative gearing:
- Where a property’s expenses exceed its income, the loss is deductible against the owner(s) other taxable income, which in turn creates a tax benefit.
- Note that even if a property creates a taxable loss, it does not necessarily mean that it is a cash loss after tax.
- Losses generated via negative gearing are generally “added back” for the purposes of calculating items such as the Medicare Levy Surcharge, HELP repayments, and other taxes or government benefits (including Centrelink benefits).
Where the property is held jointly, any tax liability or benefit generated by the rental income or loss would be split proportionately to ownership.
Interest expenses / loan repayments
Only the interest portion of loan repayments are deductible for tax purposes. For this reason, many investors opt for “interest only” loan terms. However, it is important to consider that under interest only terms, the principal balance of the loan does not reduce after each required payment.
Capital Works and Capital Allowance deductions (“non cash” tax deductions)
“Capital Works” and “Capital Allowance” deductions essentially refer to depreciation on the building and other depreciating assets (such as appliances and curtains). These are “non cash” tax deductions – meaning that you can claim a deduction for tax purposes with no outflow of cash (you’ve already spent the cash on the property purchase). This usually leads to a favourable tax outcome. To claim these deductions, you’ll need to engage a Quantity Surveyor who will provide a tax depreciation report.
Only new residential properties are eligible for capital allowance deductions; second hand depreciating assets (such as when you buy an existing property) are no longer eligible for depreciation for tax purposes. In these circumstances, Capital Works (building) deductions are still available.
NB: These deductions reduce the property’s cost base and/or result in adjustments to the CGT calculations, typically meaning an increased capital gain. The tax outcome is usually still favourable due to negative gearing and the CGT discount.
Travel expenses
In general, travel expenses are not deductible with respect to rental properties – so travelling expenses to your rental property to “inspect” the property are not tax deductible.
Property management
Consider whether you will contract a Real Estate Agent (REA) to manage the property. This can save time managing the property but comes at a cost which is usually a percentage of rental income. REA’s handle the majority of the work required in maintaining a rental property, from finding tenants, to handling routine inspections/maintenance, and ensuring your compliance requirements are met.
Other common rental property expenses
When evaluating an investment property’s viability, it’s important to consider all related expenses – some of the most common expenses are listed below:
- Body corporate / strata fees
- Council rates
- Insurance
- Interest & loan repayments
- Land tax
- Repairs & maintenance
- Real estate agent fees
Ownership
There are many considerations when determining which individual or entity is best to purchase an investment property in. This often varies on a case-by-case basis.
Key considerations include:
- Asset protection and ownership risk
- Current income levels
- Future income levels (e.g. retirement or going part time)
- Prior capital losses
- Borrowing capacity
Note: This is not intended to be financial product advice as defined in the Corporations Act 2001. JB Tax & Accounting is a Registered Tax Agent with the Tax Practitioners Board and a CPA Public Practice Certificate holder; it does not hold an AFS License. Taxation is only one of the matters that must be considered when deciding on a financial product. Consider taking advice from an AFS Licensee before deciding on a specific financial product.
If you have or are thinking of investing in property and would like further assistance, please don’t hesitate to get in touch at info@jbtax.com.au
Author: Jared Byrne CPA