Property investment and tax

In Australia, we have a very beneficial tax environment when it comes to property investment. This is especially true when you negatively gear - see our article on negative vs. positive gearing. The following should help you consider the tax issues and advantages when buying an investment property.

Negative gearing and tax

Negative gearing simply means that your costs (interest repayments, fees and related repair and maintenance expenses) are more than the income you receive from the property. This might not sound like a smart idea but it is if you want to pay less tax on your personal income. The negative return (or loss) may help take you down to a lower tax bracket, reducing the overall tax rate and the amount of tax you pay.

But can you afford to make a loss every month (effectively) to produce lower income tax or a tax refund at the end of the financial year? If so, you can apply to have your ongoing tax calculated on your new lower income.

If you positive gear (i.e. the property income exceeds the costs) you won’t have the losses but you won’t have the tax advantages either.

A couple of things to remember: the interest and related expenses are a tax deduction. And don’t forget to factor in capital gains tax if you decide to sell.

When deciding whether to negatively gear or positively gear, talk to a financial planning expert, such as Bridges Financial Group. And stay informed on the property and rental markets.

Capital gains tax

The ‘capital gain’ is the profit you make on the capital value of a property, i.e when you sell.

The gain is your capital income (the sale price) minus your capital costs (the purchase price plus any previous expenses such as the price of the property and renovations). You should make sure you keep a good record of all expenses.

Capital gains tax is only payable on properties purchased after 20th September 1985. In general, no capital gains is payable on your place of residence. However, conditions apply if you own other properties. Capital gains can be a complex area, so it’s worth talking to a tax and investment professional.

You can find out more about capital gains tax and other tax issues, at the Australian Taxation Office.