Investment Property Tax Deductions: Save on Property Tax 

As a property investor, there are several investment property taxes that you need to be aware of when dealing with investment properties. 

While the Australian Tax Office (ATO) affords investors various tax deduction benefits, paying investment property tax is an inevitable component of owning an investment property. 

For example, investors are required to pay tax on any income they receive from their property. 

It can often be overwhelming to navigate through what investment property tax you’re liable to pay and what tax deductions you’re eligible to claim. 

So, we’ve put together an investment property tax guide to help equip you with all you need to know about property taxes you’re required to pay and what strategies you can use to reduce the tax you must pay. 

Investment Property Tax 1: Capital Gains Tax (CGT) 

According to the Australian Tax Office (ATO), when you sell your property, the difference between how much you paid for it and how much you sold it for is known as a capital gain, or if you lost money, a capital loss. 

Any profit on the sale of your asset is considered a capital gain and is a payable investment property tax that needs to be declared on your annual tax return. 

Capital Gains Tax Exemptions

There are, however, several ways in which you can reduce capital gains tax or possibly exempt you from capital gains tax altogether: 

• Where your property is considered your principal place of residence (PPOR) – as a general rule, you are exempt from paying capital gains tax on the sale of the property you regard as your family home or PPOR.
• The CGT 6-year rule – this rule allows you to use your property investment, as if it was your principal place of residence, for a period of up to six years, whilst you rent it out
  • Example: Pierce bought a home in Sydney, which he has lived in for the past three years. It has been his primary residence for the entire period that he has owned it. However, he was recently offered a temporary eight-month placement in Brisbane at his company’s head office. He accepted the placement and moved to Brisbane. Because the placement was temporary, Pierce opted to live with one of his friends who had a spare bedroom. As a result, he did not treat any other home as his PPOR. After eight months, he decided to move to Brisbane permanently and sell his home in Sydney. By applying the capital gains tax property 6-year rule, he was able to sell the property and claim the CGT exemption. Consequently, he was not required to pay capital gains tax.
• The 50% CGT discount if you’ve held your property for 12 months or more before selling the property
  • Example: In Larisa’s case above, she held her investment property for seven years before deciding to sell it, so she was eligible to apply the 50% CGT discount: 
    $235,000 x 50% = $117,500. As a result, Larisa would only have to pay investment property tax on $117,500 (in addition to her other income tax). 
• The six-month rule – this is when the ATO allows you to hold two PPORs if a new home is acquired before a purchaser disposes of the old one. In this case, both properties will be treated as PPOR for up to six months. 

What Is a Capital Gains Report? 

A capital gains report breaks down and factors in all of the expenses that occur when purchasing, acquiring, or selling a property. 

These are all expenses that can be included when calculating the property’s cost base. Capital expenses include: 

1. property valuation fees;  

2. stamp duty;  

3. conveyancing fees, and  

4. title search fees 
    
   Taking all these expenses into account can help reduce any profits you may have made from the property and, therefore, the amount of CGT you pay when you sell it.  
    
   If you’re interested in assessing these expenses to help potentially reduce the amount of CGT you pay, the team at Duo Tax can help provide you with expert CGT advice. 

Investment Property Tax 2: Stamp Duty Tax 

Stamp duty is a form of tax levied by the government on the transfer of property from the seller to the buyer. It is payable by the investment property buyer and is generally due within 30 days after the property is settled. 

Stamp duty rates are dependent on various factors, such as: 

1. which state or territory you live in; 

2. the property’s value or purchase price; 

3. whether you are a first-time buyer or not, and 

4. if the home will be your primary place of residence (PPOR) or an investment 
    
   Stamp duty is the one acquisition expense that is likely to significantly drain your budget, and unfortunately, it is not tax-deductible.  
    
   However, certain circumstances may allow you to be exempt from paying stamp duty fees. 
    
   For example, some states waive the stamp duty fee for first-time homebuyers up to a specific value. This is to encourage new homeowners and help them enter the property market. 
    
   For example, in NSW, the government offers a “First Home Buyers Assistance Scheme.” 
    
   Property investors can also recover stamp duty fees by including them as expenses when calculating their cost base. This can reduce any profits they may have made from the property, reducing the amount of CGT they pay when they sell their property. 
    
   To find out more about stamp duty fees and their possible exemptions, make sure to read our guide to stamp duty fees.  

Investment Property Tax 3: Land Tax 

Land tax is an investment property tax payable on the unimproved value of the land that investors own.  

The unimproved value of the land is the value of the land without taking into account any improvements on the land, such as: 

1. buildings;  

2. landscaping; 

3. paths; and  

4. fences 
   
   The amount of land tax payable for individuals is dependent on the threshold in each state or territory: 

1. Queensland, payable on 30 June each year:  

1. Australian Capital Territory, payable each quarter: 
   The land tax you pay consists of two amounts: a fixed charge and a valuation charge. 

1. New South Wales, payable on 31 December each year: 
   Land tax is calculated on the total value of all your taxable land above the land tax threshold. 
   The thresholds for land values change each year: 

Thresholds: 

1. Victoria, payable on 31 December each year: 

1. Western Australia, payable on 30 June each year: 

1. Tasmania, payable 1 July each year: 

1. South Australia, payable 30 June each year: 

1. Northern Territory 
   The Northern Territory is the only territory (and state) that doesn’t require property investors to pay land tax. 
    
   Note: These land tax rates apply to individuals only. For the rates applicable to trusts and companies, visit the relevant state or territory’s government website.  
    
   Each state offers certain exemptions for paying land tax. Generally, however, treating your property as your PPOR makes you elect to avoid paying land tax. 

Investment Property Tax 4: Income Tax 

You’ll be required to pay investment property tax on any rental income you receive from your investment property, such as rent. 

The rental income received from your property is combined with your income (such as your wages) and assessed together each financial year. 

If your investment property runs at a loss (i.e. your expenses amount to more than your income), you can offset the loss from your income. In other words, you’ll deduct the loss from your personal income, reducing taxable income. 

Property investors often use negative gearing (i.e. when the property runs at a loss) as an investment property strategy. 

As long as your property is used to generate income, the ATO allows you to claim investment property tax deductions. 

So, by claiming all your investment property tax deductions, you can reduce the income tax you pay each year. 

The top three Investment property tax deductions include: 

1. Depreciation: As a building gets older, its structure and assets are subject to general wear and tear. In other words, each year, the value decreases and, thus, depreciates. The Australian Tax Office (ATO) offers property investors the opportunity to claim the depreciating assets as a tax deduction if the property is used to generate income. 

2. Interest on your loan: if you had to take out a loan from the bank to purchase your investment property, you can claim any interest charged on the loan as a rental property deduction. This is the most significant investment property tax deduction you can claim 

3. Rental expenses: as a landlord, you are liable for all kinds of costs. The good news is that you can claim these expenses as rental property deductions each year. 

Key Takeaways 

While investment property tax is an inevitable feature of owning investment property, there are ways in which you can reduce the amount of tax you pay. Knowing how to claim deductions accurately can significantly reduce your tax liability. 

Knowing about your investment property tax exemptions and deductions will undoubtedly boost your tax return – it could be the difference between running at a loss or having a positive cash flow. By ensuring you claim tax deductions correctly, you can maximise your tax return. 

Either way, it pays to have various property professionals in your corner. Additionally, remember to consider borrowing expenses, which can be claimed over a set period and provide financial benefits. 

Did you know that consulting with a quantity surveyor about a tax depreciation schedule is an investment property tax deduction? 

As a team of property investors, we understand that every dollar counts, especially if you’re just starting in the investment property sphere. 

Depreciation on your investment property is a significant tax-deductible expense. It’s the second-largest tax deduction for your investment property after interest on your loan. That is why it helps to purchase a tax depreciation schedule. 

Our team of quantity surveyors has the expertise to help you take your property investment to the next level through depreciation schedules and property valuations. 

To see how we can help you with your future property, get in touch with us today.