Investment properties in Australia are subject to income tax and capital gains tax. The rental income received from the property is considered taxable income, and expenses related to the property, such as interest on loans, repairs and maintenance, and property management fees, can be claimed as tax deductions to reduce the taxable income.
When the investment property is sold, any capital gain made on the sale may be subject to capital gains tax. The capital gain is calculated by subtracting the cost of the property and any improvements made, from the sale price. There are exemptions and concessions available, such as the main residence exemption and the 50% capital gains tax discount for individuals who have held the property for more than 12 months.
Main residence exemption
The main residence exemption is a tax concession in Australia that allows a person to exempt the capital gain made on the sale of their main residence from capital gains tax. The main residence is the home where an individual lives and has the intention of continuing to live in.
The main residence exemption is available to individuals, including those who are not Australian residents for tax purposes, and applies to the whole of the main residence. This means that the entire capital gain made on the sale of the main residence is exempt from capital gains tax, regardless of the length of time the property was owned.
To be eligible for the main residence exemption, an individual must have used the property as their main residence for the entire time they owned it, or they must have lived in it for some time and used it to produce income, such as renting it out while living elsewhere.
It’s important to note that there are conditions and restrictions associated with the main residence exemption, and it’s recommended to seek the advice of a tax professional to ensure that you are fully aware of the eligibility criteria and any restrictions that may apply.
What can I claim on tax with an investment property?
As an investment property owner in Australia, you can claim various expenses related to your property on your tax return, including:
Interest on loans: The interest paid on loans used to purchase the property can be claimed as a tax deduction.
Property management fees: Fees paid to manage the property, such as rent collection and maintenance expenses, can also be claimed.
Repairs and maintenance: Expenses related to repairing and maintaining the property can be claimed, provided they are not considered to be capital improvements.
Depreciation: The depreciation of the property and its assets, such as fixtures and fittings, can be claimed using a depreciation schedule.
Insurance: Premiums for insurance covering the property can be claimed.
Council rates and other property-related expenses: Expenses such as council rates, water charges, and strata fees can also be claimed.
Travel expenses: If you travel to inspect the property, attend to repairs, or manage the property, you may be able to claim the cost of travel as a tax deduction.
Legal and accounting fees: Legal and accounting fees incurred in connection with the property can be claimed, including expenses related to buying or selling the property.
Advertising for rent: Costs incurred for advertising the property for rent can be claimed.
Capital works deductions: Capital works deductions may be claimed for construction or renovation expenses, such as building a new structure or making major renovations to an existing structure.
Landlord insurance: Premiums for landlord insurance can be claimed as a tax deduction.
What borrowing costs can I claim on tax?
The ATO allows you to deduct certain borrowing expenses when purchasing an investment property. These include:
Loan establishment fees charged by your lender or bank.
Fees for valuation required for your loan approval.
Lenders Mortgage Insurance.
The cost of preparing and filing your mortgage documents.
Title search fees charged by your lender.
Mortgage broker fees.
It is important to note that if the sum of your borrowing costs exceeds $100, the deduction is spread out over five years or the length of the loan, whichever is shorter. Borrowing costs that total $100 or less are completely deductible in the tax year in which they are incurred.
For example, if you paid $5000 in LMI for your investment property, you are required to claim a $1000 tax deduction each financial year for 5 years. If you are utilising a tax agent, they will do all of these calculations on your behalf.
What if I repay my loan early?
If you end up repaying the loan early and in less than five years, you are able to claim a deduction for the balance of the borrowing expenses in the year the loan is fully repaid.
What if I got my loan part way through the year?
If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year that you had the loan.
What borrowing costs can’t I claim?
You can’t claim any of the following as borrowing costs:
The amount you borrow for the property
Loan balances for the property
Repayments of principal against the loan balance
Stamp duty charged by your state or territory government on the transfer of the property title.
Legal expenses including solicitors’ and conveyancers’ fees for the purchase of the property.
Insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed.
Borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to buy a car).
Can I claim improvements to my investment property?
Improvements made to an investment property can be claimed as tax deductions if they are capital expenses. Claims made for these types of improvements are known as “capital works deductions” and are to be claimed over a number of years.
The ATO defines these improvements as those that go beyond repairing general wear and tear to:
Provide something new.
Add to the income-producing ability or expected life of the property, or
Change the character of the property in some way.
Capital expenses are expenses incurred to improve or increase the value of the property and include:
Building renovations: Renovations to the property, such as adding a deck or a new bathroom, can be claimed as a tax deduction if they increase the property’s value.
Fixtures and fittings: The cost of installing new fixtures and fittings, such as blinds, light fixtures, or floor coverings, can also be claimed as a tax deduction if they are part of the building structure and increase the property’s value.
Things to consider
There are several important considerations to keep in mind when it comes to tax and real estate, including:
Capital gains tax: In Australia, capital gains on the sale of a property are subject to capital gains tax (CGT). It’s important to understand how CGT works and to factor it into your investment strategy.
Depreciation: Depreciation is a tax deduction that can be claimed for the decline in value of certain assets, including property fixtures and fittings. It’s important to understand how depreciation works and to ensure that you are claiming the appropriate deductions.
Rental income: Rental income from a property is taxable and must be declared on your tax return. It’s important to keep accurate records of all rental income and expenses to ensure that you are paying the correct amount of tax.
Borrowing costs: Borrowing costs associated with an investment property, such as interest and loan establishment fees, can be claimed as tax deductions. It’s important to keep accurate records of all borrowing costs to support the deductions claimed on tax.
Private use of a property: If you use your investment property for private purposes, such as a holiday home, you cannot claim the associated expenses as tax deductions. It’s important to understand the rules around private use of a property to ensure that you are not overstating your deductions.
It’s advisable to consult with a tax professional to ensure that you are fully aware of the tax implications of owning real estate and to ensure compliance with tax laws and regulations.