Tax and Negative Gearing

In the world of property investment you can make money in two ways:

  • Capital appreciation: over time your property increases in value so that it becomes worth more than what you originally paid.
  • Positive income returns: occurs when your investment income is higher than your investment expenses.

Do the sums carefully. If you have high loan repayments you may see little return or even a loss for a few years.For some investors this is not a problem because they count on; the tax relief that comes with negative gearing and the short term losses being greatly exceeded by the long term gains.

When it comes to property investments and tax there are three main things to consider:

  • Tax deductions
  • Capital gains tax
  • Negative gearing

Negative Gearing

Many investors are attracted to negative gearing because of its tax advantages. Negative gearing is when the annual cost of your investment is more than your return. Basically, when the cost of maintaining your property and paying the interest on your loan is more than the rental income you receive. With a negatively geared investment property you may be eligible for a tax deduction if you have a loss on your investment.

Case Study

Penny, a property investor, buys a unit for $300,000, putting in $50,000 of her own money and borrowing the remaining $250,000. The interest of 7% each year is $17,500 and the weekly rent is $300 or $15,600 a year.
Ongoing costs including rates, water, insurance, maintenance and depreciation allowance are $2600 each year. After expenses, income for the year will be $13,000 ($15,600 minus $2600), equivalent to a net rental yield of 4.3%. However, annual interest repayments are $17,500, so she has actually lost $4500 during the year ($17,500 minus $13,000 = $4500).

The Result: Penny is eligible to receive a tax deduction of the loss accrued.

Tax deductions

Whether your investment property is negatively geared, or getting a positive rental income, you can claim expenses relating to your rental property for the period your property was available for rent.

You may be able to claim the following expenses from your investment property:

  • Advertising for tenants, agent’s fees and commission.
  • Interest payments and loan fees.
  • Council rates, land tax and strata fees.
  • Depreciation of items such as stoves, fridges and furniture.
  • Repairs, maintenance, pest control and gardening.
  • Building and landlords insurance.
  • Stationery, phone costs and any travel to inspect the property.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax on the profit you’ve made on your investment property. So it’s based on the difference between what you sell the property for and what it cost you (the purchase price plus anything you have spent on capital improvements or renovations).

Will you need to pay Capital Gains Tax on Your Investment Property?

To work out whether you have to pay CGT on your capital gains, you need to know:

  • The time of the CGT event
  • How to apply any capital losses
  • Whether the CGT discount applies
  • Whether a CGT event has happened
  • How to calculate the capital gain or capital loss
  • Whether you are entitled to any of the CGT concessions for small business
  • Whether there is any exemption or rollover that allows you to reduce or disregard the capital gain or capital loss

Get advice from an accountant on what you might be up for when considering selling your investment property.