3 Life Events that will Change Your Taxes: Investment Properties

Part One: Investment Properties

When major milestones take place in your life, you’re unlikely to be thinking about taxes. That’s where we come in. We’ve gathered three notable life events that will influence your taxes, which we will touch on in our three-part series.

First up, we look at how buying or selling an investment property will influence your taxes!

So, you want to buy an investment property?

Buying an investment property isn’t an easy decision. It’s nerve-wracking and time-consuming, but well worth it in the end. When you buy a property, you will likely have to pay stamp duty (now known as transfer duty in NSW), a tax which covers the costs of changing ownership details.

Generally, the costs of acquiring or disposing of an investment property, including the purchase cost, buyers’ agent fees, conveyancing and stamp duty aren’t tax-deductible. The costs are instead included in the property’s base cost, reducing capital gains tax when you sell the property. This is applicable across all states and territories, except for the ACT, where stamp duty is tax-deductible.

Perhaps you want to sell your investment?

If you’re over the hump and ready to sell your investment property, you may be entitled to a 50% discount on the capital gains tax provided you’ve owned the property for more than 12 months (based on contract dates and the entity purchased). If you buy it through a trust, partnership or as an individual, you get the discount, while you are not eligible if you buy it through a company or if you’re in the business of house-flipping (see below).

Also, it’s important to note capital gains is calculated on the contract date. So, for example, if your contract is dated June 18, but you don’t settle until July 18, your capital gain would fall in the 2018 financial year even though you received the cash in the 2019 financial year. Knowing this helps you plan, in case something happens like your income spiking.

What can I claim while I own an investment property?

Any rent you receive is considered income. This means you need to declare it on your income tax return. You can also claim deductions for any expenses, including but not limited to your home loan interest, rates, land tax (if applicable), insurances, and repairs and maintenance.

What about if you have renovated your investment property?

It’s all about intention. Known as ‘house flipping’, ‘property flipping’ or buying to flip’, if you plan to buy, renovate and sell to make money, you will need to report this in your income tax return. You also are unlikely to benefit from the capital gains discount mentioned above. If you aren’t in the business of house-flipping, you can claim the improvements as a depreciable deduction during the ownership period.

If you need any further information feel free to contact us.

Stay tuned for part two on ‘Tying the knot’.