Ask James: Your property investment finance questions answered
Property investing can be a complex process, especially when it comes to the tax and finance implications, so API Magazine columnist James Fitzgerald has answered the questions that cross his desk more than any others.
Financial investment education can be quite the learning curve for many Australians who are new to investing.
Often plenty of questions are asked, so in this month’s API Magazine column, I thought I’d answer some of the most common ones.
What is capital gains tax?
To put it simply, capital gains tax is a federal tax that is payable when a profit is made from a sale, transfer, or disposal of an asset.
Not all assets attract this type of tax. The family home or primary residence is exempt, but investment properties, boats and collectibles worth more than $500 do attract CGT.
I've never lived in my investment property, so if I stop renting it and live in it for a while can I avoid capital gains tax? If so, how long do I need to live in it?
Your ‘primary residence’ needs to be one you reside in and that period you live in the home is exempt from capital gains tax.
Any investment property you own for more than 12 months, while not exempt from CGT, will receive a 50 per cent deduction on CGT.
Maintaining your property as your primary residence, even if you’re not living there can be beneficial.
There is a six-year rule which might apply; effectively, exemption from CGT for up to six years after you move out of the home. However, you can only treat one home at a time as your primary residence.
I have to relocate for work and make my unit an investment property. Do I need to change my loan to an investment loan?
Since your property is about to go from an owner-occupier to an investment, your accompanying mortgage will also need to change.
By turning your home into a rental property, your expenses may increase (interest and council rates will typically be higher, etc). It’s worth seeing if you pre-qualify for an investment loan first. Decide if you can afford it and verse yourself on the tax implications of making this change.
You may be able to write off some of your expenses as deductions when you change the status over, including agent and property management fees, bank fees and loan changes etc.
Will I need to pay more stamp duty if I convert my property to an investment within a year of buying?
The cost of stamp duty depends on the value of your property and state in which the property is located. The higher the value, the higher the stamp duty. Some states will charge a higher stamp duty rate for investors.
Stamp duty is a transfer fee paid by the property buyer to transfer the property title from the seller’s name into their name.
Your plans for the property do affect the amount you’ll be asked to pay. As a rule, it’s safe to assume the amount will be between 2 and 6 per cent of the purchase price – depending on what Australian state you’re buying in and whether you’re buying your own home or an investment property.
Do you have to apply to the Australian Tax Office to get a tax variation?
The tax office’s explanation regarding this is that ‘a rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings’.
If by negatively gearing a rental property, the rental expenses you claim in your tax return would result in a tax refund, you may reduce your rate of withholding tax to better match your year-end tax liability. This means the money sits in your pocket throughout the year, rather than coming back in the form of a refund at year-end.
If you think this is the case, you can apply to the ATO for a variation using the PAYG income tax withholding variation (ITWV) application (NAT 2036).
Do you have to pay back some of the depreciation and tax you claim on your investment property when you sell it?
On selling a property, you pay capital gains tax based on the sale proceeds less the carrying value of the property. That is, the price you paid plus or minus adjustments for capital improvement and/or depreciation.
Bear in mind that if you own the property for more than 12 months you will receive a 50 per cent discount against any depreciation previously applied against the property.
