Property investment tax deductions, depreciation & stamp duty

Considering property investment, or already an investor in Australia’s property market? Leah Oliver from Minnik Chartered Accountants discusses property investment tax deductions and benefits, depreciation and stamp duty.

Negative gearing, depreciation, capital improvements and capital gains tax are terms many of us have heard about when it comes to investment properties. However, do you understand what the benefits are, how to maximise them and what to look for when it comes to owning an investment property?

In this article, we take a deeper look into these areas to help you gain more out of owning an investment property.

What tax benefits are possible with an investment property?

From an income tax perspective, the most significant claims or deductions include those for:

• interest on loans if the property is ‘geared’ (i.e. funded by debt such as a home loan)
• depreciation and capital works (i.e. assets, building, and structural improvements)
• rates and body corporate levies, including council rates, water etc.
• management or host fees (including for real estate agents and online platforms such as Airbnb)
• insurance costs
• land tax

Holiday houses can have higher earnings potential than some other types of investment property, but also tend to incur more running costs, much like a business. Multiple guests in and out can mean extra wear and tear. The property needs to be immaculately presented between guests, and you may be supplying your guests with various amenities. As a result, holiday houses present scope for additional claims around use of facilities, such as:

• cleaning
• internet
• utilities, such as electricity and gas
• garden maintenance
• replenishing supplies
• other incidentals or running costs

Then there are the smaller claims which can add up, such as claims for:

• stationery
• postage
• telephone
• bookkeeping
• subscription fees (such as streaming services, social media platforms etc)

If your investment portfolio is diversified – meaning you hold a mix of higher risk and lower risk investments (property or otherwise) – then there may be potential capital gains tax savings in carefully timing when you sell your assets, thereby improving your overall tax position. For example:

• selling an investment that will result in a capital gain in a particular financial year, in line with a change in personal circumstances or decrease in income, when you have more room to tax effectively receive the gain;
• it may be an opportune time to make use of a carried forward capital loss from the past, thereby offsetting some or all of a capital gain on sale of an investment;
• you might hold an investment that is underperforming, and by letting it go in the same year as selling a performing investment, the gain on one is absorbed by the loss on the other

Tax planning is an important exercise for investors. The economic impact of the COVID-19 pandemic is a clear illustration of how investors can benefit from thinking about what’s ahead, planning accordingly to try and maximise their wealth, and making use of any potential tax savings available to them.

Investors may also need to consider land tax, which can often be an ‘overlooked’ cost to the uninformed investor. The exact laws for this tax vary across different states and territories. Generally speaking, it is charged as a percentage of the value of land you own above a defined threshold on a set date each year.

As an example, in NSW an individual is assessed for land tax on the total value of all land interests held, and there is a general threshold (2021 – $755,000) and premium threshold (2021 – $4,616,000).  The calculation method can differ for other types of owners. Many kinds of trusts don’t have access to the thresholds, and land tax is calculated on the entire value of land held.

When considering entering into an investment, it’s generally a good idea to do your research in advance and seek professional advice for your situation. Ensure you have a clear understanding of the costs of your investment and the possible tax implications for the structure that will acquire the asset. Different tax rules may apply. ‘Flying blind’, so to speak, can see dollars disappear unnecessarily and at pace, which could set you back years on your personal wealth path.

How much can you save with investment property depreciation?

Depreciation tax savings are individual- and investment-specific. In other words, they can be entirely dependent on factors such as the age of a property, whether it has been recently built or renovated, its annual earning capacity, and the taxpayer’s ‘other income’. The use of the investment – such as whether it’s rented out to long-term tenants or used as a holiday house – may come into it too, given that the latter may have the potential to earn more rental income.

There may also be additional considerations for those in business and family situations, as a family’s overall tax position, not just an individual’s, may need to be taken into account.

One important thing to remember is that as a general rule, tax-saving strategies should be secondary to wealth decisions. In other words, a taxpayer’s choice of investments should not be influenced too heavily by the extent of depreciation claims they may be able to access.

Inclusion of a weak investment in your wealth portfolio simply to access a tax break is likely to drain your assets in the long run. Selecting strong investments is key, and applying tax-saving strategies to the management of these investments as a secondary exercise can result in various tax savings that then support your wealth profile.

How do you claim depreciation on an investment property?

If you have built a property, or purchased one that was recently built or substantially renovated (within the last 10 years, for example), you may wish to arrange a ‘Depreciation Schedule’ prepared by a quantity surveyor. This report will present your depreciation and capital works deductions over the depreciable term of the asset. Provide a copy of this report to your accountant or financial adviser to include in your tax preparation work at year end.

Going forwards, whenever you spend money on further structural renovations or asset purchases, be sure to upload a copy of associated invoices to your personal accounting file, so that both you and your accountant or adviser can locate them easily at tax time.

What stamp duty applies with investment properties?

Stamp duty (also known as transfer duty) is a state-based tax, so whether you’ll pay it and how much you may have to pay will vary depending on where your property is located. Generally speaking, stamp duty may apply whenever an investment property is purchased or acquired by a change in ownership. Assets that can attract stamp duty include investment properties, your home or holiday home, vacant land, farming property, commercial or industrial property, or a business that includes land.

State revenue websites have stamp duty calculators that you can use to estimate stamp duty on a potential property acquisition that you may be considering. When you purchase a property, your solicitor or conveyancer should take care of the duty assessment application on your sale or transfer contract, and arrange for the duty to be paid as part of the settlement process.

Exemptions may apply in some cases, such as if a property is being transferred to the beneficiaries of a will or transferred between the members of a married or de facto couple.

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Main image source: Darren Tierney/Shutterstock.com

Leah is a qualified Chartered Accountant, Registered Tax Agent and Public Practitioner with extensive experience in accounting and finance from both a chartered and commercial background. Leah founded Minnik Chartered Accountants, Business Advisors, Tax Agents, in 2009.

Minnik’s professional group encompasses not only accounting and tax services, but also wealth strategy, finance and legal services. Leah is passionate about personal wealth consulting and assisting business owners to achieve financial freedom. You can follow her on LinkedIn.