Property & Investment Tax
Owning an investment property is a dream source of income for countless Aussies. However, many jump into this big commitment without prior knowledge or understanding of property investment and tax. New investment property owners tend to lack insight into a few of the important aspects of rental income, such as income, deductions, negative gearing, and capital gains tax. In today’s article, we touch on each of these subjects with an aim of advancing your knowledge and understanding of investment properties and claiming back your tax.
Investment properties are a popular extra source of income for many individuals and families throughout Australia.
Rental properties are a great investment, especially if your property is making a profitable income – ie positively geared. Before purchasing a rental property, a popular formula used to help decided whether certain property is a good investment and will make a profit is the 1% rule.
This rule advises that the property’s monthly rent/income should be no less than 1% of the upfront cost, including any initial renovations and the purchase price. For example, if all up the property were to cost $300,000 at the beginning upfront, the rent per month should be $3,000.
With owning a rental property there are also going to be deductions that you will have to consider each month when calculating your monthly total income. One of the main taxable deductions when owning a rental property is the Agent’s Commission.
When owning a rental property many individuals hire real estate agents to take care of the day-to-day responsibilities involved in owning a rental property. A real estate agent will collect the monthly rent and take care of paying expenses from the rent collected. Most Real-estate agents will charge anywhere between 5-7% commission of the total monthly rental income, this expense is tax-deductible.
Loan repayments on your rental property are not tax-deductible, however, the interest component is.
Other taxable deductions of a rental property are aspects such as, strata fees, water, council rates, etc. so, the day-to-day maintenance such as repairing a broken window or fixing a fence are all expenses that can reduce the assessable income – rent collected. However, when you make a massive change such as replacing the entire fence or replacing flooring such as carpet these are considered capital improvements and you will only be able to claim 2.5% per year, rather than claim it in one go.
Negative Gearing is, after collecting all the rent and paying all the expenses such as agent commission fee, maintenance, etc, you have lost money instead of gaining income.
Capital Gains Tax:
Capital Gains Tax is a tax that was introduced in September 1985 and basically stipulates that if you have an investment property and then make a gain (profit) on sale, is taxed. To demonstrate, we’ll calculate the capital gains on the following example.
If 10 years ago you brought an investment property for $400,000 and sell it now for $1,000,000 you have made $600,000 gain.
We call the initial purchase price and other expensed items that were paid for, such as, stamp duty fees, legal fees, agent commission the ‘cost base’. So, for example, extra expenses equaled $50 000, the cost base is now $450,000. So, then the income you have made is $550,000 instead of $600,000, meaning you would only get taxed $550,000, not $600 000.
To further complicate this process, if you have owned the property for over 12 months, so like the example above owning it for 10 years, you will only 50% of the gain is taxable. So instead of paying tax on $550,000, you will only be required to pay tax on $275,000. This is referred to as applying the 50% discount.
Owning an investment rental property is a source of extra income that many individuals aspire to purchase at some point in their life. However, before purchasing make sure you are considering all other aspects such as income, deductions, and capital tax. If you have any further questions, please do not hesitate to contact us.