FAQs about Tax and Property

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Some of the Frequently Asked Questions about tax implications and property

HOW DO I CALCULATE A RENTAL RETURN ON INVESTMENT?

Generally, you multiply the weekly rent x 52, then divide by property cost, then multiply by 100 to get a percentage. Your goal percentage should be 5.2% for average free standing homes, but less for luxury & prestige homes, and more for units and townhouses.

WHAT COSTS ARE ORDINARILY TAX DEDUCTIBLE WHEN I RENT A PROPERTY?

Agent fees
Insurance
Body corporate
Council rates
Advertising for tenants
Loan interest – where the loan is only for the rented property
Borrowing costs – amortised over 5 years
Depreciation on buildings – per a quantity survey report
Repairs & Maintenance – actual required repairs & not improvements

WHAT COSTS ARE NOT TAX DEDUCTIBLE WHEN I RENT A PROPERTY?

Pest & building inspection fee – they go into capital gains calculation
Legal fees – they go into capital gains calculation
Stamp duty – they go into capital gains calculation
Improvements – however can normally be depreciated over a number of years
Any of the deductible expenses incurred while you live in the property or its not available for rent. These can instead be taken into account for capital gains.

CAPITAL GAINS AND PRINCIPLE PLACE OF RESIDENCE

Usually your principle place of residence is exempt from capital gains tax, unless you use it to produce assessable income (ie run a business out of it or rent it). Partial exemptions apply in certain circumstances. You can only have one exempt residence per family. A family is a married or defacto couple living together on a domestic basis.

You can be absent from your principle place of residence for up to 6 years and buy no other property and it will remain exempt. Move back in and it resets for another 6. You can in some circumstances choose which property is your main residence if you own more than one, for the periods you’ve lived in them respectively. We recommend you use a registered tax agent to calculate your options and best scenario to reduce taxation. This can be done retrospective after selling.

WHAT IS THE RATE OF CAPITAL GAINS TAX?

There’s actually no such thing as a capital gains tax rate. When a capital gain is calculated, its simply added onto the taxpayers other income for the year, and then taxed at their marginal rate. Accordingly their rate depends completely on how much other income the taxpayer has in the year of the gain. Registered tax agents can plan for a capital gain and suggest many measures to reduce taxation in the appropriate year, but, only before the financial year ends.

WHEN DOES CAPITAL GAINS TAX APPLY?

On the date of contract NOT on date of settlement. The financial year in which a capital gain applies will go by the date of contract signing.

HOW DO I CALCULATE A CAPITAL GAIN?

Basically its the sale price, less the cost price and associated non tax deductible costs above. We also add back any depreciation on buildings claimed. If the property is held for more than 12 months, you then take 50% of the gain. That gain is simply added onto the owner’s other income for that year. There are many pitfalls and options with calculating a capital gain which should be done for your tax return by a registered tax agent.

WHAT IS NEGATIVE GEARING?

Basically running your rental property at a loss. Ordinarily your interest and running costs will outweigh your rental income. As you can deduct this loss against other normal income (eg from employment), you’re obtaining a short term tax benefit. You need to ensure that when you sell the property you have regained your losses plus more. Furthermore, the best feature of negative gearing is while you get 100% deduction for your losses during ownership, you only get taxed on 50% of the capital gain when the property is held for more than 12 months.

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