If you’ve got a rental property, or are considering investing in one, then you should know just how taxation applies to your rental income.
- What is rental income for tax purposes?
- Deductions to help save on rental income tax
- Land and property taxes
- Capital gains tax
- What about negative gearing?
Investing in property is a big deal. Around one-third of all home loans in Australia are for investment purposes, according to ABS data.
Below are some of the lowest investment home loan rates in the market this month.
Base criteria of: a $400,000 loan amount, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 16 January 2020. View disclaimer.
According to Domain’s House Price Report for December 2018, median weekly rents range from $360 in Perth to $560 in Canberra. So for Canberra property investors, that’s a median annual rental income of $29,120.
But as with your regular income, the tax man will come a-calling on your rental income, so you’ll need to be prepared to part with some of it. BUT, a savvy investor will make sure they know what is taxable and what isn’t. And when it comes to investment properties, there are lots of different rules for tax.
Rental income for tax purposes
According to the Australian Taxation Office (ATO), rental money you receive from renting out a part or all of your property is considered to be assessable taxable income. This means it’s taxed at your marginal tax rate and must be declared in your income tax return.
The marginal tax rates for 2018-19 below show how much tax you may have to pay on your rental income:
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,001 – $180,000||$20,797 plus 37c for each $1 over $90,000|
|$180,001 and over||$54,097 plus 45c for each $1 over $180,000|
If your income before tax is $80,000 a year, and you get $20,000 in rental income a year (before deductions), that brings your total taxable income to $100,000. Assuming no other changes, you’d pay $24,497 in tax that year. Other investment returns must also be included in your taxable income, including realised gains and dividends from shares and interest earnt from your savings account or term deposit.
Bear in mind this is a very simplistic explanation of how rental income tax works – there’s much more to factor in than just how much income you receive. You also need to factor in deductions.
Deductions to help save tax on rental income
The ATO states that investment expenses can be claimed as tax deductions as long as they are used on parts of the house that are treated as an investment property. Some of the main types of expenses you can claim include management/maintenance costs, borrowing expenses and depreciation. You cannot claim deductions on things you yourself don’t pay for, like when your tenants pay for improvements or utility bills.
Management and maintenance costs that can be deducted include:
- Advertising to find new tenants
- Bank fees and loan charges
- Body corporate fees, cleaning costs and council rates
- Electricity and gas not paid by the tenant
- Home, contents and landlord insurance
- Legal expenses and land tax
- Property manager fees and commissions
- Repairs and maintenance
- Travel and car expenses for rent collection or inspections
- Costs incurred for the inspection or maintenance
Borrowing expenses meanwhile include interest on your investment home loan, but not the principal amount to be repaid. Other borrowing fees include:
- Loan establishment fees
- Lender’s mortgage insurance (if applicable)
- Title search fees
- Mortgage broker fees (if you used one)
- Stamp duty charged on the mortgage
You can also claim depreciation losses on newly purchased items, such as appliances, blinds &carpets, furniture and water systems. All of these deductions could end up saving you a lot of money on your investment property/properties, so make sure you don’t forget about them.
The list above is not exhaustive, so check the ATO’s section on investment property deductions for more information. Hiring an accountant can also be worthwhile if you’re struggling to keep track of all your deductions.
Don’t forget about land and property taxes
Also referred to as council rates, property tax funds local government initiatives like rubbish collection and public maintenance (such as mowing and street cleaning). This tax will vary based on the location and value of your property. Speak to your local council to find out the kind of council rates you’ll have to pay.
Land tax is a tax payable everywhere (excluding the Northern Territory) on the combined unimproved value of the land you own, calculated on what your land would be worth if it was vacant. As you can see from the list of points above, this tax is deductible on investment properties.
Capital gains tax applies to investment properties
When you sell a capital asset such as shares or property, you make either a capital gain (selling the asset for more than you bought it for) or a capital loss (selling for less than you bought it for). Capital gains tax is the tax incurred on the profit of these investments, with the capital gain being added to your assessable income just as your rental income is. This can dramatically increase your taxable income.
But, as things stand at the moment, a capital gains discount can apply to investors who’ve held their property for more than one year, to discourage people from flipping houses too frequently. This capital gains tax discount is currently 50%, so if you made a profit of $100,000 on the sale of your property, you’d only pay tax on $50,000.
Note how we said at the moment – the Labor Party has been quite vocal about their plans to cut the capital gains discount if they get elected in 2019 to 25%, as they believe it has not achieved its aim to boost housing supply and encourage the building of more houses, and will cost this year’s budget over $10 billion. Naturally, the Liberal Government is vehemently against such a change, as are many property investors, but that opens up a whole other can of worms. Just know that this rule may no longer apply come the 2019 Federal Election.
You can read more about the proposed changes to capital gains tax discounts on the Labor Party’s website here.
Labor has also proposed the removal of negative gearing for all but newly constructed houses…
What about negative gearing?
Yet another tax break you can currently get on investment properties is negative gearing.
The way negative gearing works is relatively simple – if you’re making a loss on your investment property (your expenses outweigh the income you receive), then you can deduct this loss from your taxable income. Negative gearing is not a money-earning strategy, but rather a loss-reducing strategy. You can use your rental property losses to reduce your taxable income in the short-term, and recoup the losses in the long-term by selling the property, which brings us back to capital gains tax.
By comparison, a property is positively geared when the rental income received is greater than the interest on the loan.
Read Savings.com.au’s extensive article on negative gearing for a broader insight as to how it works. One key point to take away is that negative gearing is only useful if you plan to carry that loss forward in order to make a profit on the property in the future. Otherwise, you’re still losing money.
Always keep receipts for rental property expenses
According to the ATO, records of rental income and deductible expenses need to be kept for five years, which is especially relevant for long-term deductions like asset depreciation. You can’t claim any rental property expenses on your tax return if you can’t prove the claim through a receipt or bank statement, so always keep a record of receipts, either digitally or physically.
You can use the ATO app or other useful budgeting, saving and tax apps to help with this.
Savings.com.au’s two cents
Taxation on rental property income and expenses can be quite complicated, so when in doubt, read the ATO’s many pages on the topic or consult the advice of an accountant. As one of, if not THE biggest investments you’ll ever make, you can’t afford to not know what you owe, or how much you could save by deducting certain expenses.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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