What to know about property investment and tax
2nd June 2020 - Freya Cormack
As a property investor, your tax obligations will change. It’s important to be aware of what expenses can be claimed as tax deductions, the implications of capital gains tax and the changes to how you pay your tax.
One of the major benefits is that the interest you pay on your home loan is tax deductible. Regardless, it's best to always try and find the most competitive interest rate.
What is negative gearing?
While many investors will experience a significant income boost by renting out their property, sometimes the rental income won’t be enough to cover expenses. This is where negative gearing often comes in.
Negative gearing happens when you borrow money via a home loan to invest and your investment income is less than your investment expenses. While negative gearing may sound like a bad thing, many investors use it strategically.
This is because these losses are usually tax deductible. Investors buy a property in a high-growth area and rely on the assumption that the short term losses are worth it if they are able to sell the property for capital gains in the future.
It’s important to note that even though these losses might be tax deductible, you are still losing money. Consider speaking to a financial advisor if you’re thinking about investing in a negatively geared property.
- Related: How to cope with mortgage stress
What is positive gearing?
A positively geared property is great for an investor’s cash flow. It refers to your rental income exceeding any investment expenses, therefore increasing your overall income. A positively geared investment property is a great source of passive income and could even possibly replace (or at least supplement) an investor’s regular working income.
This way, you won’t have as many tax deductions, but your income will be greater.
What is capital gains tax on an investment property?
When it comes to selling your investment property, you’ll either make a capital gain or a loss. Whether you make a gain or a loss isn’t just dependent on whether you sell the property for a higher price than you originally paid. It’s the difference between how much it cost you to purchase, improve and maintain the property, and the amount you receive when selling it.
This loss or gain has to be reported in your income tax return. The capital gains tax isn’t a separate tax, it’s a part of your assessable income. As an individual, your capital gains tax rate will likely be the same as your marginal tax rate.
Some investors may be exempt from paying a capital gains tax, but it’s unlikely. However, if you make a capital loss, you won’t be required to pay capital gains tax. You won’t be able to offset a capital loss against any other type of tax, but you can use it to offset capital gains in the future.
You will be eligible for a 50% capital gains tax discount if you keep the property for at least a year before selling.
What other tax deductions can I make on an investment property?
There are a range of tax benefits when you purchase an investment property. Make sure that you know what you can and can’t deduct as it could be the difference between a positive and negative cash flow.
Here are some of the tax deductions you may be eligible for as a property investor:
- Home loan interest
- Strata fees
- Capital gains tax discount for a property owned for more than a year
- Legal fees
- Costs to advertise your rental property
- Land tax
- Building and appliance depreciation
- Agent and property management fees
- Repairs and general maintenance (including for gardening)
This isn’t an exhaustive list. Remember that everyone’s circumstances are different and it’s smart to check with a tax accountant whether you are eligible for these deductions.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
^The estimated average future interest savings is calculated as at 15 April 2020 based on Lendi assisting customers into new loans with an average interest rate reduction of 0.89% for the 11 months prior, and assuming a median loan term of 26 years on both the old and new loan and all monthly principal and interest repayments will be made on time. Any future savings figures are estimated averages only, and do not take into account any product features or fees (including refinancing or break costs). Your savings will be different.