Before you buy an investment property it pays to have a think about not only where to buy but what structure do you hold the property in and any related future tax implications. This will put you in the best tax position going forward by thinking about these issues relating to your investment today. Here’s some of the more important things to consider;
- Legal ownership – Consideration on deciding who owns the property also needs to be balanced against the associated costs of the ownership structure. If the property is negatively geared you may be advised to hold the property 100% in the name of the higher income earner, however, just remember that same income earner will be equally taxed 100% on the capital gain if and when sold. Other legal structures besides holding property jointly include trusts, companies and SMSF’s. All will have different tax treatments and will be suitable depending on the property purchase or development. SMSF’s have additional regulations that need to be adhered to so it’s important to know all the facts from a SMSF Specialist Advisor if you’re looking to buy with your SMSF.
- Finance Structure – Interest expense is only deductible to the extent the borrowed money is used for the investment property. Be wary of using redraw facilities which mix private and investment transactions. This will create an apportionment burden and could potently cost you lost interest deductions. Also, be wary of home loan reduction schemes that increase the interest costs each year as these will definitely attract the attention of the ATO due to its tax avoidance schemes. For interest expense to be tax deductible it doesn’t matter what property is secured by the loan it all comes down to the purpose of borrowing the funds and the connection between the borrowed funds and the property purchase.
- Land Tax – Land tax is a state tax paid annually and will vary depending on which state the property is purchased, so ensure you ask the question and monitor if you are likely to exceed the relevant states land value thresholds. Seek legal advice in the state your looking to purchase.
- Capital Gains Tax – Depending on the structure and how long the property has been held determines what CGT Concessions are available to you when you sell the investment. Take this into account when considering how long you intend to hold the property. Further, if you mix the use of the property between your primary residence and as an investment property this will further affect the capital gains tax you pay. Using your property for business purposes could unlock some considerate CGT Concessions. Leasing out your property through Airbnb or the likes will implicate your home for CGT purposes. Capital gains tax is a complex area so its prudent you have this discussion with your accountant before buying.
- GST – There’s different GST treatment on both the purchase and ongoing GST claims relating to the property. This will depend on a number of factors including on whether the property is new residential or commercial. You need to ensure the contracts are clear and your aware of your obligations.
- Tax Benefits – Owning an investment property can be daunting, especially when you constantly hear how the ATO is always watching and warning property owners the consequences of claiming deductions they’re not entitled to. Determining what costs are deductible and what expenses count towards the cost of the investment will depend on the purpose on which you purchase the property. If you are purchasing the property to develop and sell rather than to provide rental income this will have a completely different effect in how associated costs are treated and your tax on any gains. Further depreciation deductions will be different depending on if the property is new versus improved when you purchase this, so it pays to talk to your accountant so your clear on these things before buying.
If you would like to know more information before you buy your next investment property, please contact our office or make an appointment online. Maven Accounting & Advisors can provide you with specialised advice about the critical issues to consider before you buy your investment property.
This article is provided as general information only and does not consider your specific situation, objectives or needs. It does not represent accounting, taxation or financial advice upon which any person may act.
Guest Blogger – Tania Magon