Whether you’re new to investing or are just expanding your investment portfolio, investment property tax is really important to understand. You might have heard about property investment strategies that help you minimise your overall tax — understanding the benefits you can take advantage of and the liabilities that come with property investment will help you pocket more money long-term.
In this article, we’ll explain the benefits of property tax, how land tax works, and how to keep the right records. However, if you have any specific questions about how it works, you can always contact Templeton Property.
Investment property tax deductions: The real benefits of property investment tax
Just like part of your wage is deducted and paid to the government as income tax, so is a portion of the profit you make on your investment property. If the property is owned in your name, any profits you make within a year are then added to your total annual income and tax is applied. If you hold the asset for more than 12 months, you’ll owe the ATO a Capital Gains Tax. The good news is – a discount of 50% is applied to this tax for individuals. Yay!
Negative gearing can have an impact on your property tax
Negative gearing is where the income you’re making from your investment property is less than you’re spending on the property. So, it’s where you’re losing money on your investment. This sounds like a bad thing, but your loss here can actually be offset against other income, like your wage. A tax deductible loss is still a loss, though. The best case scenario in your property investment is that it has high capital growth prospects — that’s where the real money is made.
You can make claims for depreciating assets
You can claim depreciation for any items you purchase for your investment property. So, appliances, blinds, or hot water systems — whatever the asset, if it depreciates in value over time, that loss in value can be claimed on your tax return.
The ATO has set time limits for how long you can continue to claim this depreciation over the asset’s life. Your accountant or quantity surveyor can prepare a depreciation schedule that will be adjusted yearly. Each year, you can adjust this schedule to calculate the amount for each individual asset.
This is a big part of why we recommend having a quantity surveyor inspect your investment property.
Stamp duty concessions
In Queensland, there is no stamp duty concession granted for the purchase of an investment property, whether as an individual (so in your personal name) or as a company or trust.
Capital Works vs expenses
Larger types of capital items added or spent on your investment property are often classified as Capital Works. These are depreciated over the span of their lifetime, compared with regular maintenance of the property, such as plumber maintenance or lawn mowing. Regular maintenance can be written off or expensed in the tax year that the expense occurred.
It’s good to understand how you can make the most of your property investment tax benefits.
Making the most of your tax deductions
Expenses you incur from owning and maintaining your investment property can often be claimed as tax deductions. These are offset against the income you make from it. If the claimable expenses are greater than the income you make from the property, this is called Negative Gearing.
Loan Interest
The interest you pay on your investment property loan is tax deductible. An important distinction is that the repayment of the principal component is not claimable.
Property repairs and maintenance
Another investment property tax deduction is the cost of general repairs and maintenance. Where you have wear and tear in the investment property that needs to be repaired, you can claim these expenses in the year they’re incurred. Even expenses like your rates, urban utilities bills, plumber repair, and lawn mowing expenses count as investment property tax deductions.
Larger item expenses or replacements are classified as capital expenses, which are depreciated over a set time period rather than being expensed in one year.
Property Depreciation
The ATO allows you, as a property investor, to claim depreciation as a tax deduction on your tax return. If you pay the cost of the capital improvement, such as a new appliance, air conditioner, or repainting of the property, for example, you can write this expense off over a set period of time. If you purchase a new property, the depreciation benefits can include a much larger number of items, with the tax benefits being considerably more.
Management and Administration Charges
All standard expenses for owning and managing an investment property are tax deductible. These kinds of expenses include rates, urban utilities, insurance, smoke alarm checks, property management, and more.
Professional Advice
Your professional advice can also become one of your investment property tax deductions. Those additional expenses involved with owning an investment property can also often be claimed. These are expenses like annual accountancy fees or legal advice regarding dividing fences issues etc.
Navigating Queensland Land Tax for investment properties
Land tax is a Queensland state tax that’s calculated on the freehold land that you own. The tax is calculated based on the land you own as of midnight on the 30th of June each year. The government will assess the unimproved land value of each parcel of land (this excludes improvements such as a house or buildings). Unless the property or owner has an exemption (like the property being your principal place), you are liable for this tax.
Land Tax Rates
The amount you will pay for your land tax will depend on your ownership type and the value of your property. The rates for this tax are significantly higher for companies and trusts than for individuals. You can calculate your tax using the Queensland Government’s tool here.
Who pays land lax?
If you own property in Queensland that has an unimproved value collectively at over $600,000 for individuals and $350,000 for companies and trusts, then you may have to pay land tax. This includes property investors, companies, trustees, and absentee owners.
Exemptions and Concessions
The most common exemption is for land that is used as your principal place — this is often called a “home exemption’’. Other exemptions include:
- Charitable institutions exemption
- Primary production exemption
- Moveable dwelling (caravan) parks exemption
- Aged care facilities exemption
- Retirement villages exemption
The importance of accurate record-keeping for tax time
Keeping detailed records of your property’s costs, including maintenance, loans, depreciating assets, capital improvements, and any other associated fees, can be a lifesaver come tax time.
Type of records to keep
We recommend keeping a record of all expenses associated with your investment property. These might include:
- Acquisition costs
- Loan costs
- Operating expenses
- Occupancy costs
- Depreciation
- Capital improvements
- Professional services
- Any other expenses you incur as a part of owning the property, like stationery or travel expenses
Don’t forget to keep records of the expenses associated with the purchase of your property initially. These costs can be added to the purchase price to determine the ‘cost base’ of the property, and, although they’re not ‘expensed’ at the time of purchase, they are claimable as a reduction later on to offset the capital gains tax when you do eventually sell the property.
These costs include legal fees, buyer’s agent fees, and building and pest inspection fees.
Duration of record-keeping
You should keep your financial records on hand for at least five years. In some circumstances, the ATO may ask for proof of your income or expenses as part of an audit up to five years after the claim.
Role of proper record-keeping
By keeping the right records, you can ensure that your tax returns are accurate and that you’re prepared in the case of an audit, helping you avoid any penalties.
It’s more than that, though. Record keeping can help you track your income and expenses and monitor your finances overall. It also means you have a snapshot you can use as you plan for the future.
Before you go ahead and purchase an investment property in Queensland, it is important to understand the taxes that come with investment properties — at the time of purchase, during the ownership, and come sale time. By understanding the different structures, tax benefits, and how it all works, you can make the most of your investment property and the tax deductions that come with it.
Need a hand with your property buying journey? Book a consultation with Templeton Property.