Tax implications of buying an investment property

Whether you’ve decided to purchase your very first investment property, or you’re adding to your portfolio, it’s important to be well versed on the tax implications of attaining real estate as a financial asset.

Ownership

If a couple are looking to buy a property that will be negatively geared, the following could assist them in determining the individual name they will purchase the property in, or in what percentage:

• Who will receive a greater tax benefit from owning the property? —  As that individual will be on a higher marginal tax rate.
• If/when they sell the property, Capital Gain Tax is paid by the individual(s) that own the property.
• Ensuring asset protection. For example, a doctor who earns a high salary would certainly benefit from the negative gearing of an investment property, but what are the risks of the doctor losing that property as a result of practicing medicine? (E.g. being sued for malpractice).

Debt structure

Where you have existing debt that you cannot claim a tax deduction for —e.g. debt on a home that you live in, which is your principle place of residence—and you are about to buy an investment property, you want to structure your debt tax effectively.

Debt structured tax effectively refers to an arrangement in which, of a total debt amount, the proportion of debt that is tax deductible has been arranged to be at the highest amount it can be and debt that is not tax deductible is at the lowest proportion. You want to maintain this position for the entire time you own the investment property.

By having the most tax effective debt structure in place, you will:

• Increase your tax refund each year, meaning more money in your pocket.
• Save a greater amount of money over the journey of owning an investment property.
• Pay off the debt that is not tax deductible at a faster rate.
• Be in a stronger financial position, allowing you to buy your next investment earlier than if your debt was not structured tax effectively.

Restructuring your debt appropriately is likely to be especially relevant for people who currently own a home and want to buy a further property for moving into, whilst renting out their pre-existing property in the future.

Other considerations

Acquisition costs

Initial acquisition costs that cannot be claimed as tax deductions immediately but added to the cost base include, but are not limited to:

• Purchase price
• Stamp duty
• Legal and conveyance fees
• Borrowing costs

In some circumstances, mortgage insurance, legal fees and borrowing costs may be claimed as a tax deduction over five years or less.

Maintenance

Repair and maintenance costs incurred on the property prior to it being available for rent cannot be claimed as an immediate tax deduction. These costs are capital in nature and when the property is sold, they can be added to the cost base when calculating Capital Gains Tax.

Land tax

Land tax is payable on investment properties where that property has a total taxable value of more than $250,000 in Victoria.

Quantity surveyors

Finding the right Quantity Surveyor is very important, as the depreciation schedule that they produce can increase your tax refund. The difference between a good surveyor and an average one could result in hundreds to thousands of dollars saved annually.

Records

Record keeping is extremely important, as the investment property expenses can be your biggest tax deduction claim. The Australian Taxation Office (ATO) closely review this information on tax returns, and can call for substantiation of your expenses. A great property manager can be extremely useful when it comes to accurate book keeping. Maintaining detailed records throughout your ownership period will also help you when it’s time to sell, ensuring that no costs are missed when you are trying to reduce the Capital Gains Tax. Precise records also make your accountant’s job much easier, thereby reducing their fee too.

For those who are new to real estate, the tax implications of buying an investment property can seem complicated. But the more organized you are, the easier the process can become. I hope that these tips can make your property ventures less stressful and more efficient.

Yours sincerely,

Derek Ma, CPA

Partner

www.cotsfordandma.com.au