Property Tax Tips For Investors

You may feel like you’re paying too much in property taxes, but there are several ways to reduce your tax burden.  One way is by claiming deductible expenses on your return. If you itemize deductions, be sure to include qualified items such as mortgage interest and property taxes paid during the year.  

You can also deduct points paid when refinancing a home loan if they were not deducted in the previous two years or more than $100,000 of debt was cancelled or discharged after 2006. You might also consider making improvements that increase the assessed value of your home – adding insulation or new windows could provide some relief!  For more tips about reducing your property tax bill, please keep reading below!

Australia has a lot of property taxes, but this article will focus on the land tax. Land tax is based on two factors: the value of your land and how much it’s worth. So the first thing you’ll need to do is research what your land would sell for if you were to put it up for sale today. You can then calculate your annual land tax using that figure and multiplying by the applicable rate in your state or territory. 

Tax Tips For Investors

Many Australians invest in property, financial markets and other assets, both in Australia and overseas. Managing the tax on your investments can help you increase your wealth.

The ATO’s data matching and information-gathering capabilities are significant and cover many capital transactions and investment revenue streams.

It is more important than ever to report investment income, including from overseas, and maintain accurate records, correctly calculate capital gains or losses on disposal and comply with the various rules and concessions available to investors.

Speak with a CPA Australia-registered tax agent who can advise you on the tax consequences of your investments.

Investment Deductions

You can claim a deduction for expenses incurred in earning interest, dividend or other investment income, but not for exempt dividends or other exempt income.

Examples of investment deductions include:

  • account-keeping fees for an account held for investment purposes
  • interest charged on money borrowed to buy shares and other related investments from which you derive assessable interest or dividend income
  • ongoing management fees or retainers and amounts paid for advice relating to changes in the mix of investment
  • a portion of other costs if they were incurred in managing your investments, such as some travel expenses, investment journals and borrowing costs.

If you attend an investment seminar, you are only entitled to claim a deduction for the portion of travel expenses relating to some investment income activities.

Rental Properties

The ATO has an ongoing focus on checking rental deductions and matching reported income against details from real estate agents, Stayz, AirBnb and other providers.

If you are a landlord, you must lodge a multi-property rental schedule with your individual tax returns.

Make sure that interest expense claims are correctly calculated, rental income is correctly apportioned between owners, claims for costs to repair damage and defects at the time of purchase are depreciated, and that holiday homes are genuinely available for rent.

Landlords of rental properties that are being rented out or are ready and available for rent can claim immediate deductions for a range of expenses. These may include interest on investment loans, land tax, council and water rates, corporate body charges, repairs and maintenance and agents’ commissions.

Landlords may be entitled to claim depreciation for the declining value of assets such as stoves, carpets and hot-water systems. They may also be able to claim a deduction for capital works spread over a number of years, such as structural improvements like re-modelling a bathroom.

Be aware that depreciation deductions for residential real estate properties are now limited to outlays actually incurred on new items. For properties acquired from 9 May 2017, landlords can no longer depreciate assets that were in the property at the time of purchase; however, should they purchase a new (not used or refurbished) asset, they can depreciate that asset.

Residential landlords are no longer allowed travel deductions relating to inspecting, maintaining or collecting rent for a rental property.

COVID-19 has raised a number of tax issues for rental property owners or agents to consider, including:

  • deductions for properties where tenants are not paying their full rent or have temporarily stopped paying rent as their income has been affected due to COVID-19
  • reductions in rent for tenants whose income has been adversely affected by COVID-19 to enable them to stay in the property
  • assessable receipts of back payments of rent or an amount of insurance for lost rent
  • interest deductions on deferred loan repayments for a period due to COVID-19
  • cancellation of bookings due to COVID-19 for a property that is usually rented out for short-term accommodation but has also previously had some private use by the owner
  • the private use of a rental property by the owner (e.g. holiday home) to isolate during COVID-19 and adjusting available deductions
  • changes to advertising and other fees for short-term rental properties during COVID-19 due to no demand for the property.

While you’re still able to claim deductions for your expenses and depreciation, you may need make adjustments if you’ve changed how you use the property.

If you’re a landlord, it’s well worth reading the ATO’s information on holiday homes, renting out part or all of a home and holiday apartments in commercial, residential properties.

No Deductions For Vacant Land

Deductions for holding vacant land have now been limited. The new rules apply to costs incurred on or after 1 July 2019, even if the land was held before that date.

Deductions for expenses incurred for holding costs of vacant land can continue to be claimed by corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investment trusts, public unit trusts and unit trusts or partnerships where all the members are the previous entity types.

There are some entities and circumstances where deductions for vacant land can still be claimed. For example, where the entity holding the land is a company, where you use the land in carrying on a business, or exceptional circumstances apply.

Expenses of holding land remain deductible if they are incurred in carrying on a business such as farming or gaining or producing assessable income.

The rules can be complex and require you to determine whether you are holding vacant land, whether it satisfies the various requirements or if exceptional circumstances apply.

The ATO has produced a flowchart to assist in determining if deductions for expenses related to vacant land are limited.

Residential Property And Non-residents

Suppose you are a foreign resident for tax purposes at the time you dispose of your residential property in Australia. In that case, you will not qualify for the CGT main residence exemption unless you satisfy the life events test.

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Gains Or Losses From Cryptocurrencies

Almost one in five Australians invest in cryptocurrencies. If you are or have been involved in acquiring or disposing of cryptocurrencies in the past, you need to be aware of the tax consequences.

You may have to pay tax on any capital gain you make on the disposal of the cryptocurrency. There are also rules when you exchange one cryptocurrency for another cryptocurrency and for chain splits, staking rewards and airdrops.

The ATO now matches transaction data from digital exchanges, so it is more important than ever to ensure cryptocurrency gains and losses are correctly reported.

Different rules apply if you use cryptocurrency in business, such as running your start-up or trading large volumes of cryptocurrency.

Capital Gains Tax Planning

You should carefully time the disposal of appreciating assets, as this may trigger a capital gain. It is important to recognise that CGT is triggered when you enter into a contract for the sale of a CGT asset rather than on its settlement.

This is particularly important where the entry and settlement of the contract straddle the end of the financial year. In these circumstances, it may be preferable from a cash flow perspective to defer the sale of the CGT asset to the subsequent year where other relief may be available, such as a capital loss sold on another asset.

You should also take care to ensure that an eligible asset is retained for the 12-month holding period required under the CGT discount. The CGT discount is generally not available to foreign residents or temporary resident individuals.

Keep proper records for all of your investments and ensure that you keep them for at least five years after a capital gains tax event occurs.

Foreign Investments

If you are an Australian resident with overseas assets, you need to include any capital gains or losses you make on those assets in your tax return. You may also have to include income you receive from overseas interests in your tax return.

You can receive income even if it is held overseas for you. So, for example, if you receive foreign income or gains taxable gains in Australia, and you paid foreign tax on that income, you may be entitled to an Australian foreign income tax offset.

Be aware that the ATO has information exchange agreements with revenue authorities in many foreign jurisdictions and therefore is likely to receive data on any of your overseas investments and income.

Exchange-Traded Funds

Exchange-traded funds (ETFs) are an increasingly popular investment product, but calculating the tax on them can be complicated. Because ETFs are classified as trusts, not ordinary company shares, they fall under the Attribution Managed Investment Trust (AMIT) rules.

This means that you will need to separately report the various distributions and capital gains amounts in your tax return.

While many investors will receive a member annual statement with the necessary details, these reports are optional. However, you need to ensure that you correctly report ETF amounts on your tax return, so check to see if the necessary details are there and follow up with the fund or registry if they aren’t.

Investment Products

Towards the end of the financial year, there is often an uptick in promoting investment products that may claim to be tax-effective.

Check to see if a Product Ruling is available or if a Taxpayer Alert has been issued by the ATO.

A product ruling provides ATO assurance on the tax consequences of an arrangement, provided it is carried out as described in the ruling. However, it isn’t a sanction or guarantee of the tax effectiveness of a product or investment.

Taxpayer alerts are warnings issued by the ATO about higher-risk arrangements or issues.

You should form your own view about the commercial and financial viability of a product. Consider issues such as whether the projected returns are realistic, the ”track record” of the management, the level of fees compared with similar products, and how the investment fits an existing portfolio.

If you are considering such an investment, seek independent advice before making a decision. 

Property Tax Tips: Capital Gains Tax (CGT) – Main Residence Exemption

The concept of your ‘main’ or ‘principal’ residence is important due to its significant influence on your future financial situation. When it comes time to sell your home, it is one of the few windfalls you can receive (assuming you make a profit when you sell) that is not subject to tax. Your main residence is exempt from tax on any capital gains, provided it meets a few criteria.

For most people, figuring out what is your main residence is pretty straightforward. But for others, it is not so simple due to their circumstances. In some cases, you may even have a choice as to what property you claim. For these situations, it’s important to understand a few key rules:

It Must Be A Dwelling

A dwelling is considered a building or part of a building consisting mainly of residential accommodation with land under the accommodation. Therefore it could be a caravan or mobile home but cannot be vacant land.

You Must Reside In The Property

Definitions are not explained in the tax legislation, however, the Australian Tax Office (ATO) has listed a number of factors that are taken into account to determine whether they would allow your claim for main residence exemption. These include:

  • Length of time you lived in the property (it’s often assumed this should be at least 3 months, but it’s not stipulated by law)
  • Where the rest of your immediate family live
  • Whether you keep your personal belongings at the property
  • The address where your mail is actually delivered
  • Whether your address on the electoral roll matches that of the property
  • Connection of services such as gas, telephone and electricity
  • Your intention of occupying the premises

One Main Residence At A Time

You can only claim one residence as your ‘main’ residence at any one time. However, you are allowed a six-month overlap of main residences when you are changing homes (between the time of acquisition of the new and disposal of the old).

Temporary Absence

If you choose to move elsewhere and rent out your home at some stage, you can continue to claim the main residence status on the property for up to 6 years even though you don’t actually live there. This will not impact on your ability to claim deductions on your now investment property, it will only impact on CGT. The catch is that you will not be able to claim the other property you are now living in as your main residence during this time if you claim your former home as your main residence.

Partial Exemption

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There are times when a property can only receive a partial exemption.

For example, when you move house, your new home becomes your main residence, and you then rent out your old home. When your old property is rented and no longer considered your main residence, it will be subject to CGT. 

However, CGT will not be calculated during the period you lived there and claimed it as your main residence.

The other time your main residence will receive a partial exemption is when a part of it is used for business and other such income-producing purposes (e.g. a beautician servicing customers in a spare bedroom). 

In these circumstances, the proportion of the dwelling used for such purposes will be subject to CGT for that period, while the rest of the dwelling will continue to be exempt. This area can be tricky to interpret, so do seek professional advice if you have concerns.

Pre-occupation Period

Suppose you are building a home on vacant land or substantially renovating a property and therefore cannot live at the property. In that case, you can still claim the main residency in both examples under a “pre-occupation exemption”.

Under this exemption, you can treat the property as your main residence for up to 4 years before you actually occupy it provided you occupy it as soon as practicable and live there for at least 3 months after doing so. Naturally, you must not claim any other property as your main residence during this time.

Property In Individual Names

The property can only be claimed as the main residence if held in individual names with a few minor exemptions. Property held in a company or trust can not claim the CGT break.

Because of this significant tax implication, most people hold their home in their personal names. If asset protection is an issue, best to consider holding it in just one partner’s name, which still allows you to access the CGT benefits while affording some asset protection.

Taxation is not always a straightforward area, and many rules are subject to interpretation, so I encourage you to seek professional advice from your accountant if you have any questions or concerns.

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