Key Tax Questions to Ask Before getting the Keys to Your Next Investment Property Purchase

Whose name should be on the contract?

When buying an investment property consideration must be given to who’s name to buy the property in. If the property is expected to be negatively geared, that is the expenses associated with the property (council rates, loan interest, maintenance and so on) outweigh the rental return, consideration may be given to placing the property in the name of the spouse with the higher taxable income. Under the current income tax rules net rental losses can be claimed as a tax deduction against income from salary and wages leading to a bigger refund at tax time.

 The trade-off is that if the investment property is later sold for a capital gain, then the entire capital gain will need to be included in that spouses’ income tax return potentially leading to a larger tax bill in the year of sale. This is why it is so important to speak to a registered tax agent about which approach is best for your individual circumstance prior to signing the contract.

What about when I sell – Will I have to pay Capital Gains Tax?

Capital gains tax (CGT) is one of the biggest tax burdens levied on property investors and the ATO are willing to wait a long time for their slice of the pie. Generally capital gains tax is payable upon the profits made on the sale of an investment property in the year in which the contract of sale is signed.

The final amount of capital gains tax arising from the sale of a property can be tricky to calculate as consideration must be given to a wide range of factors. There are also are a raft of exemptions and concessions to be considered on a case-by-case basis. For example:

• Where the investment property has been used as a private home for part of its ownership period, the principal place of residence exemption may exempt some or all of a capital gain from being taxed.
• For property acquired prior to 20 September 1985 the disposal will be generally exempt from CGT.
• Assets that have been held for more than twelve months will generally receive a capital gains tax discount of 50 per cent where the property is owned by an individual or a trust.
• Certain improvements and modifications to the property may reduce the capital gain payable upon disposal.

Should I use a trust?

One of the most asked questions we see is whether a trust structure should be setup for a property investment. Trusts are a complex investment vehicle that require time and money to administer so the benefits of their use must be thought through carefully. Some of the key considerations for the use of a trust when purchasing property include:

• Who will be the beneficiaries of the trust both now and in the future? Discretionary trusts typically do not pay tax on their assessable income but rather distribute to trust beneficiaries who then pay tax at their marginal rates. This can lead to potential tax savings on both rental profit and capital gains made upon selling the property.
• Will the property will be used as a private home at any stage? The principal place of residence concessions for capital gains do not apply to trusts structures.
• What impact will this have on state-based land taxes? Trusts are typically levied at higher land tax surcharge rates than if owned by an individual. The rules vary from state to state so this must be considered on a case-by-case basis.
• Will the property be positively or negatively geared? When a trust records a net loss, those losses are quarantined in the trust and cannot be used to reduce the taxable income of the trust’s beneficiaries. This means purchasing a property in a trust will likely prevent any negative gearing benefits being received.
• Will the property be used as a home first? Stamp duty exemptions and other state-based concessions for first home buyers are generally not accessible through a trust structure.