What do I need to consider when it comes to property investment and tax?

Answer

When it comes to choosing a loan for an investment property there’s more to think about than getting the lowest interest rate. It’s important to consider the type of loan you take and how its structure can affect the tax you pay.

There are other tax considerations too, some are outlined below. It’s important to get tax advice for your specific situation.

Tax deductions

Property investors can benefit from tax deductions for the costs of owning an investment property, the potential for negative gearing and capital gains tax discounts when the property is held for more than 12 months.

When you own an investment property, you can often claim a tax deduction for the interest you’ve paid on your loan and many other expenses related to the property that may include:

  • advertising costs and property management fees
  • loan interest charges and ongoing loan fees
  • council rates, land tax and strata fees
  • building depreciation and the loss of value over time in fittings and fixtures like ovens, dishwashers, carpets and hot water systems
  • repairs, maintenance, pest control and gardening costs
  • building and landlord insurance
  • stationery, phone costs and travel expenses related to property inspections
  • accounting or bookkeeping fees.

Capital gains tax

If you ever choose to sell your investment property, any profit you make is considered a capital gain and will be subject to tax and treated as income on top of any regular income you earn in the same financial year.

However, capital gains tax concessions are available to property investors. Firstly, the price you paid for the property—which reduces the amount considered as profit—includes the original purchase price plus any buying and selling costs like stamp duty, legal fees and the real estate agent’s commission.

And if you have owned the property for at least 12 months, only 50% of the profit will be subject to capital gains tax. Say you made a profit of $100,000 and you’ve owned the property for more than one year, only $50,000 will be subject to capital gains tax. The remaining 50% will be tax free.

Reporting at tax time

When you first arrange your loan you can make sure it is set up to make your tax reporting and accounting obligations easy. For example, if you have one loan that you use solely for your investment property—and not the home you live in which is not tax deductible—it will be easier to prove at tax time that your expenses relate to your investment property.

Who is the borrower and owner of the investment property?

If you’re borrowing money with someone else, consider whose name the investment property and loan will be in. Sometimes with a negatively geared property, the person earning the higher income may benefit from the expenses of a negatively geared investment more than the person on the lower income.

What type of loan is best?

Think about how you’ll repay your loan—interest only or the principal and the interest?

Most people who buy a home arrange to repay the loan in full over time. That means their repayments pay the principal and the interest.

Investors may choose to pay the interest only—not the principal—because the interest on an investment loan is tax deductible. However, paying the interest only means the principal will not be reduced at all so the original loan amount remains owing.

Managing rental shortfall

Make sure you are prepared to manage any rental shortfall and periods between tenants. When an investment property is empty you may lose income but will still need to make loan repayments. Keep in mind that while you’ll need to meet your loan repayments, the interest component will be counted as expenses at tax time and should be tax deductible.

Important information

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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.

This information is provided by AMP Life Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.