How buying an investment property affects your tax, GST and capitals gains
Investment properties are a great long-term investment. However, if you’re considering buying residential or commercial investment property you need to be up to speed on important tax, GST and capital gains rules.
That way, you know exactly where you can save money – and what you’re up for depending on your situation.
Tax rates if you don’t have an Australian Business Number (ABN)
If you buy a residential property you don’t need an ABN. However, if you ever purchase any goods or services for the property that cost more than $50, your supplier has to include an ABN on their invoice, or 48.5% of your payment will have to go to the tax office.
For example, if an electrician invoices you $500 to install some lights and there’s no ABN on the invoice, you pay him $257.50 and withhold $247.50 for the Tax Office.
If you own a commercial property, you definitely need an ABN, or the business renting your property has to withhold 48.5% of their rent for tax – and we don’t want that!
GST and commercial property rent
You usually only have to worry about GST when you buy a commercial property. If your:
- gross rent, excluding GST, is more than $50,000 a year, you need to be registered for GST.
- gross rent is less than $50,000 you can voluntarily register for GST.
And if you are registered for GST you:
- must include it in the rent you charge
- can claim GST credits for any rental expenses
- need a tax invoice to claim the GST credits on any purchases you make
- must give your business tenant a tax invoice so that they can claim the GST in the rent.
- the amount of rent will include GST
- you can claim GST credits.
- GST is based on the market value not the amount they pay you.
- profit generated from the use of the rental property.
- bond money if you entitled to keep any
- insurance payouts for things like such as compensation for lost rent
- maintenance costs
- body corporate fees and charges.
- borrowing expenses
- amounts for decline in value of depreciating assets
- a capital works deduction for the cost of capital improvements
- capital repairs once the cost has been charged to the appropriate fund.
- time rented below commercial value. For example, if you let your daughter run her business out of there at no cost until she gets on her feet, you can’t claim deductions for this period.
- levies paid to a special fund for particular capital expenditure.
- special contributions for major capital expenses to be paid out of the general purpose sinking fund.
- costs of buying and selling the property (see capital gains below)
- bought the property
- inherited it
- received it in a divorce settlement or as a gift
- make improvements to property.
GST and your renter
If your renter is registered for GST and they use the premises solely for business:
If your renter is not registered for GST or the rent is partly for private use:
For example, say you rent office space to someone who’s not registered for GST and they pay you $220 per week, but the market value rent is $440 per week. You’ll still need to account for $40 GST so you can claim GST credits.
Are you earning additional income from the property?
On top of rent, there are other potential income streams to remember, such as:
Claiming on property expenses
At the other end of the scale, there are the inevitable expenses such as:
What you might be able to claim expenses for
In addition, there are things you might be able to claim for over a number of years including:
What you can’t claim expenses for
Make sure you don’t include:
More than one owner
If you own your property with someone else then rental income and expenses must be attributed to each co-owner according to your legal interest in the property regardless of any other agreement you might have.
Capital gains tax on rental property
Capital gains tax is the tax you pay on any gain made on an income-producing asset eg investment properties. Depending on when you bought your rental property, capital gains tax might apply when you sell it.
Some of your expenses can reduce your capital gains tax. However, there are some expenses – like the costs of buying or selling the property – you can’t claim as deductions.And if the property is owned by more than one person, each of you may have to pay capital gains tax based on your legal interest in the property.
Keep records of everything
You need to keep records of all your income and expenses relating to your rental property. And hold on to them for five years after you sell it.
For capital gains tax purposes, you must have records stating whether you:
And finally, if you are thinking about smarter ways to make a real estate investment, have a read of our article on buying an investment property through a self managed super fund.
The information within this text and any reference to Australian taxation issues are intended as a guide only. Clients should seek their own accounting and tax advice based on their personal situation.