As a property investor, there are several investment property taxes that you need to be aware of.
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 trying 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 amount of tax you have to pay.
Table of Contents
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.
- 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.
- 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).
- 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:
- The six-month rule – this when the ATO allows you to hold two PPOR if a new home is acquired before a purchaser disposes of the old one. Both properties will be treated as PPOR for up to six months in this case
What Is a Capital Gains Report?
A capital gains report breaks down and factors in all of the expenses that you occur when purchasing, acquiring or selling the property.
These are all expenses that can be included when calculating the cost base of the property. Capital expenses include:
- property valuation fees;
- stamp duty;
- conveyancing fees; and
- title search fees
Taking all these expenses into account can help reduce any profits you may have made from the property and therefore, reduce the amount of CGT you pay when you sell your property.
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 that is levied by the government for the transfer of the property from the seller to the buyer. It is payable by the investment property buyer and is generally due within 30 days after settlement of the property.
Stamp duty rates are dependent on various factors, such as:
- which state or territory you live in;
- the property’s value or purchase price;
- whether you are a first-time buyer or not; and
- 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 poke a significant hole in your budget, and unfortunately it is not a tax-deductible expense.
However, certain circumstances may allow you to be exempt from paying stamp duty fees.
For example, some states waiver the stamp duty fee for first-time homebuyers up to a specific value. This is to encourage new homeowners and help them enter into the property market.
For example, in NSW, the government offers a “First Home Buyers Assistance Scheme.”
Property investors can also recover some of the stamp duty fees by including it as in expense when calculating their cost base. It can reduce any profits you may have made from the property and therefore, reduce the amount of CGT you pay when you sell your 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:
- buildings;
- landscaping;
- paths; and
- fences
The amount of land tax payable for individuals is dependent on the threshold on each state or territory:
- Queensland, payable on 30 June each year:
| Taxable Value | Land Tax Rate |
|---|---|
| less than $600,000 | $0 |
| $600,000 or more but less than $1,000,000 | $500 + 1 cent for each $1 more than $600,000 |
| $1,000,000 or more but less than $3,000,000 | $4,500 + 1.65 cents for each $1 more than $1,000,000 |
| $3,000,000 or more but less than $5,000,000 | $38,500 + 1.25 cents for each $1 more than $3,000,000 |
| $5,000,000 or more but less than $10,000,000 | $72,500 + 1.75 cents for each $1 more than $5,000,000 |
| $10,000,000 or more | $150,000 + 2.25 cents for each $1 more than $10,000,000 |
- Australian Capital Territory, payable each quarter:
The amount of land tax you pay is made up of two amounts: a fixed charge plus a valuation charge.
| Fixed Charge | Valuation Charge |
|---|---|
| $1,326 | A marginal rate charged on the average unimproved value of the land:
2019-20 and before: averaged over the last 3 years; 2020-21: averaged over the last 4 years; and 2021-22 and after: averaged over the last 5 years. |
| Average Unimproved Value | Percentage Marginal Rate |
|---|---|
| up to $150,000 | 0.52% |
| from $150,000 to $275,000 | $780 + 0.62% of the part that is more than $150,000 |
| from $275,001 to $2,000,000 | $1,555 + 1.10% of the part that is more than $275,000 |
| $2,000,000 and higher | $20,530 + 1.12% of the part that is more than $2,000,000 |
- 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:
| General Threshold | Premium Threshold |
|---|---|
| $100 + 1.6% of the land value above the threshold, up to the premium threshold | $60,164 + 2% of land value above the threshold |
Thresholds:
| Tax Year | General Threshold | Premium Threshold |
|---|---|---|
| 2021 | $755,000 | $4,616,000 |
| 2020 | $734,000 | $4,488,000 |
| 2019 | $692,000 | $4,231,000 |
- Victoria, payable on 31 December each year:
| Taxable Value | Land Tax Rate |
|---|---|
| less than $250,000 | $0 |
| $250,000 or more but less than $600,000 | $275+ 0.2% of the amount more than $600,000 |
| $600,000 or more but less than $1,000,000 | $975+ 0.5% of the amount more than $600,000 |
| $1,000,000 or more but less than $1,800,000 | $2,975+ 0.8% of the amount more than $1,000,000 |
| $1,800,000 or more but less than $3,000,000 | $9,375+ 1.3% of the amount more than $1,800,000 |
| $3,000,000 or more | $24,975+ 2.25% of the amount more than $3,000,000 |
- Western Australia, payable on 30 June each year:
| Taxable Value | Land Tax Rate |
|---|---|
| less than $300,000 | $0 |
| $300,001 to $420,000 | $300 |
| $420,000 to $1,000,000 | $300 + 0.25 cent for each $1 more than $420,000 |
| $1,000,000 to $1,800,000 | $1,750 + 0.90 cent for each $1 more than $1,000,000 |
| $1,800,000 to $5,000,000 | $8,950 + 1.80 cents for each $1 more than $1,800,000 |
| $5,000,000 to $11,000,000 | 6$66,550 + 2 cents for each $1 more than $5,000,000 |
| $11,000,000 or more | $186,550 + 2.67 cents for each $1 more than $11,000,000 |
- Tasmania, payable 1 July each year:
| Taxable Value | Land Tax Rate |
|---|---|
| less than $24,999 | $0 |
| $25,000 to $349,999 | $50 + 0.55% of value above $25 000 |
| $350,000 or more | $1,837.50 + 1.5% of value above $350 000 |
- South Australia, payable 30 June each year:
| Taxable Value | Land Tax Rate |
|---|---|
| less than $450,000 | $0 |
| $450,000 or more but less than $723,000 | $0.50 for every $100 or part of $100 above $450,000 |
| $723,000 or more but less than $1,052,000 | $1,365 + $1.25 for every $100 or part of $100 above $723,000 |
| $1,052,000 or more but less than $1,350,000 | $5,477.50 + $2.00 for every $100 or part of $100 above $1,052,000 |
| $1,350,000 or more | $11,437.50 plus $2.40 for every $100 or part of $100 above $1,350,000 |
- 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. Ensure you visit the relevant state or territory’s government website for the rates applicable to trusts and companies.
Each state offers certain exemptions for paying land tax. Generally, however, treating your property as your PPOR makes you elect not to pay land tax.
Investment Property Tax 4: Income Tax
You’ll be required to pay investment property tax on any income you receive from your investment property, such as rent, for example.
The income received from your property is combined with your personal income (such as your wages) and assessed together each financial year.
If your investment property runs at a loss (i.e. your expenses amounts 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, resulting in a reduced income tax amount.
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 being used to generate an income, the ATO allows you to claim investment property tax deductions.
So, by claiming all your investment property tax deductions, you can reduce the amount of income tax you pay each year.
The top three Investment property tax deductions include:
- Depreciation: As a building gets older, its structure and the assets within the building 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, as long as the property is being used to generate an income
- Interest on your loan: if you had to take out a loan from the bank to purchase your investment property, you are entitled to claim any interest charged on the loan as a rental property deduction. This is the most significant investment property tax deduction you can claim
- Rental expenses: as a landlord, you are liable for all kinds of expenses. 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 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.
Either way, it pays to have various property professionals in your corner.
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 ourselves, at Duo Tax, 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. In fact, 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.
Tuan Duong is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation. Reach out to him directly on 0431 154 356 or email tuan@duotax.com.au
