If you're thinking about investing in property you need to understand the tax consequences. In Australia, like many other parts of the world, owning an investment property offers a mix of potential tax benefits and costs. From claiming deductions on interest payments and holding costs to understanding the nuances of Capital Gains Tax (CGT), property investors need a comprehensive grasp on these matters to make the most out of their investments. Read our comprehensive guide below to learn more.

Investment property tax benefits and costs

Investing in property can be a wise financial move, but it's important to understand both the benefits and costs involved, especially regarding taxes. Here, you'll get an overview of how owning an investment property can impact your taxes, helping you make informed decisions.

Property investment tax benefits

Interest payments and holding costs

Owning a rental property comes with its share of expenses. From interest payments, updates, upkeep, local council fees, to fees for property management, the list goes on. But here's some positive news: many of these costs can potentially be claimed as tax deductions if your property is up for rent or already rented out.

For many property owners, the interest that accumulates on a mortgage tied to a rental property can be claimed as a tax deduction. Additionally, other often-claimed deductions include fees for property management, land taxes, and upkeep-related costs. This upkeep can range from general cleaning and landscaping to insurance coverage and repairs.

Claiming depreciation on rental assets

When you purchase items for your rental property, such as new appliances, they naturally lose value over time due to wear and tear. This decline in value is known as depreciation. You can claim this loss in value as a tax deduction, often referred to as tax depreciation or capital allowance, spread across the useful lifespan of that item. To understand the duration for which you can claim depreciation on assets related to your rental property, it's a good idea to consult the Australian Taxation Office's guide on the effective life of an asset.

Claiming for construction and renovations

If you've undertaken construction or renovation projects at your rental property, you might be eligible to claim these expenses as deductions. Typically, these capital works deductions are spread out over a duration of 25 to 40 years. The exact time frame will depend on factors like the start date of the construction, the purchase date of the building, and its intended use.

Offsetting losses with negative gearing

When your rental property's expenses exceed its earnings, resulting in a net loss, this is termed as "negative gearing." The upside to negative gearing is that you might be able to leverage this loss to counterbalance income from other sources, ultimately lowering your taxable income for the year.

Tax implications of property investment

Owning investment property in Australia brings with it various tax considerations. Here are some potential financial burdens or downsides:

Capital Gains Tax (CGT)

If you decide to sell your investment property, any profit you realise could be subject to Capital Gains Tax. We'll discuss more about CGT in this article.

Tax on rental income

The revenue generated from your rental property is subject to taxation. This rental income is added to any other income you may have, such as wages or investment earnings, and the total is taxed according to your income tax bracket.

Asset depreciation

Assets such as appliances and furniture can be claimed as depreciation for tax deductions on your tax return; however, it's important to maintain detailed records and a depreciation schedule of these assets.

Deductibility of property expenses

Certain expenses related to your property are tax-deductible, while others are not. Expenses related to the depreciation of assets or improvements to the property's structure can be claimed as deductions. On the other hand, expenses incurred during the purchase or sale of the property are generally not eligible for tax deduction.

GST considerations

If you lease out a commercial property to another business for rental income, you may have to deal with Goods and Services Tax (GST).

Tax regulations can be complex, so if you're ever uncertain, it's wise to consult with a tax expert or refer to the Australian Taxation Office for guidance.

4 types of tax on investment property

Income tax

The income from your rental property is subject to tax, just like your regular income.

When lodging your income tax return, you must include the rental income alongside any other earnings, such as your salary or profits from other investments.

Suppose your property's expenses exceed its rental income, creating a loss (known as "negative gearing"). In that case, you can deduct this loss from your overall income, potentially reducing your overall tax liability. Some investors favour this strategy over "positive gearing," where the property generates a profit because it can decrease the taxes they owe.

Fortunately, the Australian Tax Office (ATO) allows property investors to deduct various property-related expenses from their rental income, which can help maintain the profitability of their investment.

Immediate deductions

Immediate deductions refer to expenses that you can claim as tax deductions in the same financial year they occur. These include: costs for advertising for tenants, council and water rates, land tax, interest on your mortgage, and expenditures for repairs and maintenance, etc.

Long-term deductions

Some costs can be spread out over multiple years. A good example is "depreciation," which lets you subtract a portion of the property's value each year to account for wear and tear and the aging of the building and its fixtures.

Remember, not every expense is deductible. You can't subtract costs like the initial tax paid when buying the property (stamp duty), your mortgage payments, or any expenses your tenant covers.

Capital Gains Tax (CGT)

Thinking of selling your rental property? Be prepared for the potential of Capital Gains Tax.

If you make money when selling your rental property, that profit is seen as a "capital gain." This profit needs to be reported on your yearly tax return. The extra tax you owe because of this added profit is called Capital Gains Tax or CGT.

The ATO has some rules that might let property investors avoid paying some or all of the CGT.

Here are some of the exceptions and special rules:

Main Residence (MR) Exemption

This rule applies if the property was your primary home.

Capital Gains Tax Property 6-Year Rule

This rule allows you to treat a property as your main residence, allowing you to apply the main residence exemption from Capital Gains Tax.

The Six-Month Rule

A rule that offers some flexibility when moving between properties.

50% CGT Discount

The 50% Capital Gains Tax (CGT) Discount allows you to halve the capital gain on your property when calculating tax, provided the property was held for more than 12 months. This discount is designed to encourage long-term investment in property.

If you want to learn the effects of Capital Gains Tax on inherited property, check out our article "Understanding the new ATO rules on Capital Gains Tax on inherited property".

Stamp Duty Tax

When you buy an investment property, there's a tax called stamp duty that you must pay. Think of it like a sales tax for buying property. This tax is due when the property's ownership changes hands, from the seller to the buyer. That's why some also call it transfer duty.

The Australian Taxation Office (ATO) doesn't let you claim this as a tax deduction on your income tax return. So, property investors should check how much they'll have to pay before buying a property, as it can affect their rental income and expenses.

Generally, every property transfer, even among family or different ownership structures, requires stamp duty. Only a few exceptions exist.

Now, while stamp duty is an immediate concern for property investors, you should also be aware of other tax obligations. These can include capital gains tax, land tax, and claiming various tax deductions. Speaking to a tax agent or financial advisor can help you navigate the complex world of property taxes, maximise your rental income, and make sure you claim all allowable expenses and deductions.

Land Tax

Land tax is different from stamp duty. While you pay stamp duty just once when you buy a property, land tax is an ongoing charge based on the land's value, unless the property is your main home (often referred to as Principal Place of Residence or PPOR).

Every state and territory has its own rate for land tax, and it's based on the land's "unimproved value." This means that when calculating land tax, they don't include the value of buildings, walkways, landscaping, or fences on the land.

Each state or territory has its own land tax rates and thresholds. You can find these on the Revenue Office websites for each state.

It's worth noting the Northern Territory is unique because property investors there don't have to pay land tax. If you're a property investor, it's essential to be aware of these ongoing tax obligations, as they can affect your rental income and expenses.

To learn more about land tax, read our article on land tax thresholds.