Investment Property Tax Return
Acquiring an investment property continues to be a profitable method of investment in order to increase your wealth and secure your financial future. Purchasing an investment property takes years of savings to build up the required capital to secure a loan for the investment.This also includes a significant portion of your income to repay the principle and interest components of the loan. To assist investors, the government provides certain tax incentives in order to promote property as a feasible asset to be incorporated into any portfolio. However, it needs to be noted that there are rules governing such tax incentives that needs to be applied, used and claimed in accordance with the applicable taxation laws. It is advisable to hire a tax accountant to assist you with your tax return to maximize the deductions you are eligible to claim.
Property investors can tap into some useful tax benefits, including the ability to claim a tax deduction for many costs associated with owning a rental property, the tax shield produced by the strategy of negative gearing and the availability of capital gains tax discounts if the investment is held for over 12 months.
Tax deductions
As an investment property owner, you are able to claim a tax deduction for a variety of expenses related to your rental property as well as the interest on loan. These expenses can be claimed against income produced by the property if it is tenanted or available for rent. Under the governing rules, certain expenses towards investment properties that were incurred during the period that the property was tenanted or available for rent are considered to be rental expenses or rental deductions. A tax adviser will be able to give you a clear picture on what can be claimed under your individual circumstances. In general, the following expenses can be claimed on tax:
- Loan interests and ongoing loan fees
- Property management fees
- Advertising fees for tenants
- Council rates, land tax and strata fees
- Repairs, maintenance, pest control and gardening costs
- Building and landlord insurance
- Building depreciation plus depreciation of fittings and fixtures like stoves, carpets and hot water heaters
- Stationeries, phone costs and any travel expenses to inspect the property
- Accounting or bookkeeping fees
*Acquisition costs like conveyance costs and stamp duty will be added to the cost base for capital gain tax purposes and are non-deductible expenses.
Negative gearing
Negative gearing exists when the costs of owning a rental property exceed the rental income. The difference, which represents a loss, can normally be used to offset against other capital gains.
Interest is the most important part of a tax return in a negative gearing arrangement. As long as your property is available for rent, the interest incurred on any money you have borrowed for the property will be tax-deductible, including money used to purchase the property, carry out repairs and improvements to the property or deal with tenant related issues. However, only the borrowed money that is used for income producing purpose is entitled to adeduction. For instance, if a loan was drawn down to purchase a living property and a rental property, the tax-deductible portion is limited to the interest that is attributed to the rental property only.
Investment properties don’t have to be negatively geared. If the rent outweighs the costs of owning the property, positive gearing stands and owner can expect to pay tax on the profit generated by the property.
Capital Gain Tax (CGT)
The time may come when you decide to sell your investment property and any gains on the sale will be subject to CGT. The taxable portion of the gain will be included as your assessable income in the year of sale.
The cost base used to calculate the capital gain should be the original price of the property plus buying and selling costs like stamp duty, legal fees and agent’s selling commission, which helps to reduce the amount of gain for tax purposes. Secondly, a property which has been held by owner for more than 12 months is entitled to claim a 50% discount on the capital gain tax at tax time. For instance, if the property was purchased for $400,000 inclusive of all charges and sold for $500,000 inclusive of all costs, then your capital gain is $100,000. If the property has been held for more than 12 months, then only 50% of the capital gain is assessable. Only $50,000 of the capital gain will be subject to capital gains tax at your marginal tax rate.
Individuals may find it hard to formulate an effective strategy to minimize tax on an investment property. A qualified tax accountant can assist you in minimizing your tax liabilities and ensuring that you retain the highest return possible from your investments.