Investment Property Tax Return

Acquiring an investment property continues to be a profitable method of investment to increase your wealth and secure your financial future.  Purchasing an investment property takes years of savings to build up the required amount to secure a loan for the investment. This also includes the sacrifice of a significant portion of income to repay the loan as well as the interest on the loan.  In order to assist investors, the government provides certain tax incentives in order to promote properties as an achievable asset to be incorporated within any portfolio. However, it needs to be noted that there are rules governing such tax incentives that need to be applied, used and claimed in accordance with the applicable taxation laws. It is advisable to hire the services of a tax accountant to assist you with your tax return to maximise the deductions you are eligible to claim.

Property investors can tap into some useful tax benefits, including the ability to claim a tax deduction for many of the costs of owning a rental property, the tax shield produced by the strategy of negative gearing and the availability of capital gains tax discounts if the investment is held for over 12 months.

Tax deductions

As an investment property owner, you are able to claim a tax deduction for a variety of expenses related to your rental property, as well as for the interest on the loan. These expenses can be claimed against the income produced by the property if it is tenanted or available for rent. Under governing rules, certain expenses towards investment properties that were incurred during the period the property was tenanted or available for rent are considered to be rental expenses or rental deductions. A tax adviser will be able to give you a clear picture of what can be claimed under your individual circumstances. In general, the following expenses can be claimed on tax:

  • Loan interest and ongoing loan fees
  • Property management fees
  • Advertising fees for tenants
  • Council rates, land tax and strata fees
  • Repairs, maintenance, pest control and gardening
  • Building and landlord insurance
  • Building depreciation plus depreciation of fittings and fixtures like stoves, carpets and hot water heaters
  • Stationery, phone costs to inspect the property
  • Accounting or bookkeeping fees

*Acquisition costs like conveyance costs and stamp duty will be added to the cost base for capital gain tax purposes and are non-deductible expenses.


Negative gearing

Negative gearing exists when the costs of owning a rental property exceed the rental income. The difference, which represents a loss, can normally be used to offset against other capital gains.

Interest is the most important part of a tax return in a negative gearing arrangement. As long as your property is available for rent, the interest on any amount of money you have borrowed for the property will be tax-deductible, including the money used to purchase the property, undertake repairs and improvements, or deal with tenant related issues. However, only the money borrowed which is used for income producing purposes is entitled to the deduction. For instance, if a loan was taken out to purchase a living property and a rental property, the tax-deductible portion is limited to the interest on the rental property only, not the living property.

Investment properties aren’t always negatively geared. If the rent outweighs the costs of owning the property, positive gearing stands and the owner can expect to pay tax on the profit generated by the property.

Capital Gain Tax (CGT)

The time may come when you decide to sell your investment property and any profit you make on the sale will be subject to CGT. The taxable portion of the extra profit will be included in your assessable income in the year of the sale.

The cost base used to calculate the capital gain should be the original price of the property plus buying and selling costs such as stamp duty, legal fees and the agent’s selling commission. Adding the buying and selling costs helps to reduce the amount of profit for tax purposes.  Secondly, if an owner has held a property for more than 12 months, they are entitled to claim a 50% discount on the capital tax for that property at tax time.  For instance, if the property was purchased for $400,000 inclusive of all charges and sold for $500,000 inclusive, then your capital gain is $100,000.  If the property has been held for more than 12 months, then only 50% of the capital gain is assessable.  That would mean that only $50,000 of the capital gain will be subject to the capital gains tax at your marginal tax rate.

Individuals may find it hard to formulate an effective strategy to minimise the tax on an investment property. A qualified tax accountant can assist you in minimising your tax liabilities and ensure that you retain the highest return possible from your investments.

Investment property tax return checklists

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