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Investment Property Tax Implications: What You Need To Know

investment-property-tax-implications

In this article, you will find out the investment property tax implications you should know. If you are thinking of buying an investment property or turning your current residence into an investment, there are tax implications you must consider. Depending on whether or not the property brings in an income, you will still need to account for it each year when submitting your taxes. As an investor, you should be familiar with the tax implications that apply to the sale of investment properties, too. Here’s what you need to know.  

 

Tax events and implications while you own your investment property 

 

Depending on your personal financial situation owning an investment property can have some tax benefits. If you are renting out the property (i.e., it is a source of income) there are some expenses you can claim against your personal income. These expenses include things like interest on your mortgage, losses incurred due to a shortfall between your mortgage and the rental income (known as ‘negative gearing’), insurance, repairs and maintenance, advertising costs, property management fees and council rates and strata levies. You should always seek relevant tax advice from a professional tax agent before claiming these types of deductions. 

If your property is positively geared (the income it generates exceeds the cost of owning the investment) you are still able to claim property-related deductions, but as the rent will add to your taxable income for the year you may be taxed in a higher bracket.  

Tax events and implications when you sell your investment property 

When it comes time to sell your investment property a tax event will be triggered. Capital Gains Tax is the key tax implication in this situation and Foreign Residents Capital Gains Withholding Tax may also apply to investors who live abroad. 

When Foreign Residents Capital Gains Withholding Tax is applicable, purchasers will withhold 12.5% of the purchase price and pay it to the Australian Taxation Office at settlement.  

 

Tax events and implications if your investment property is transferred or bequeathed 

 

In the event that you pass away, and an investment property forms part of your estate, the beneficiary of the property will not pay tax on the property in the first instance. If the beneficiary decides to continue to use the property as an investment, they will take on any of the applicable tax-related responsibilities outlined above. If the beneficiary decides to sell the investment property, they will be partially exempt from paying CGT if they choose to sell the property within two years of inheriting it, regardless of whether it continues to produce income or not. 

 

Tax tips for investment property owners 

 

Property Investment Tax Implications (2)

 

Staying on top of your taxes can be hard at the best of times, but when investment properties are involved there are many more things to consider. If you are about to complete your taxes and have sold an investment property in the last financial year you should be prepared with the following to make life easier: 

  • Contract of Sale; 
  • Sale of property fees (agent’s commission, marketing costs, conveyancing fee); 
  • Conveyancing documents, including the settlement statement; and 
  • A calculation of the property’s capital gain or loss. 

 

We recommend that you speak to your tax agent or advisor prior to any of these tax events occurring so you know all your options to make an informed decision.   

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