Capital gains tax is one of the complicated terms in the investment world. It’s essential, though, to understand it when it’s time to sell your investment property. We break down some of the frequently asked questions about capital gains tax here.
What does it mean?
Capital gain means you sell your asset for a profit. This includes investment properties and shares. Selling an asset for a capital loss is when you lose money on that asset come sale time.
What’s excluded from CGT?
Capital gains tax only applies to your assets, not your personal property. Your personal home, car, and collectables are excluded from taxation. According to the ATO website, depreciating items don’t count in calculating capital gains tax. This is usually plant & equipment in your rental property portfolio. Also excluded are:
Personal assets like boats and furniture
Anything bought before September 20th, 1985 (pre-CGT)
Winnings or losses from gambling
Do rates vary?
That depends if you’re an individual or a business. The rate paid to you is the same as that of your income tax rate the year of your return. The way capital gains tax is calculated remains the same. The most common method is subtracting your cost base from the sale price of your property.
The cost base is how much you bought the property for, plus any associated expenses. This includes stamp duty, plus legal and incidental costs. You also must subtract depreciating items. Finder.com visualising the calculations like this:
Can I get a discount on my capital gains tax?
Yes, you can get a discount on your tax, but only if you’ve held the asset for more than 12 months. You can also claim a discount for the amount of time the asset was used for personal reasons.
If you’re not sure about your capital gains tax, there’s free calculators available from investment websites like Your Investment Property.
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Tax-time isn’t something to fear if you have your affairs in order. At the end of it you get something even better: a tax refund! The ease of filing your your tax return depends on you and how you handle your affairs. The amount you get back depends on what you know you can claim. We have some advice to help you handle both.
Deppro handles property depreciation reports, not tax, but we know a thing or two about the latter. ‘Tax depreciation’ is the same thing as property depreciation. It’s part of your annual taxable income.
The cost of a depreciation schedule is actually fully deductible, along with whatever depreciation amount you can claim that year. That’s more money going back into your bank account!
Investment property is a source of income, and you must list it on your tax return. Depreciation is the ‘extra’ essential that can push you further to your goal. Imagine paying off your loan or now having the potential to buy another property. Depreciation earns investors tens of thousands of dollars over the time they hold the assets in their portfolio. That’s just for one property. Imagine being in the 1% club and having sixor more.
To get your best-ever tax return, you need your accountant on your side. You would’ve handed over your tax depreciation report to them, anyway. It’s their job to file a return that gets you the best amount back possible.
Before you meet with them, it’s possible to estimate how much you’ll get back. The ATO releases a new edition of their tax return estimator every year, and it’s free to use. You need:
Your PAYG statement (for gross income and tax withheld)
A list of your tax offsets and what you can claim
Calculation of your Medicare levy
To know your residency
If your numbers are accurate and you have the correct information, what you get from your accountant won’t be much different. If at all.
To get your best-ever tax return, you must be organised. When the end of financial year comes, you need these tools in order to claim:
List of tax offsets
Not all tools are free, but they pay for themselves in the end thanks to that amazing tax refund!
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We answer rental property depreciation questions on a daily basis here at Deppro, and some have popped up more than others. If you’re new to the tax depreciation world, or just need a refresher to jog your memory, read on.
What’s the difference between ongoing and capital expenses?
When you hire a property manager, pay for advertising and cleaning, alongside various fees and rates for council and the like, they’re ongoing expenses.
Capital expenses contribute directly to your rental property depreciation. Capital works like the rendering of the building, any electrical work or appliances installed are eligible.
How can I measure depreciation potential?
You can go the old fashioned route and crunch the numbers yourself, but what’s the point if you don’t have to? Deppro has a free online depreciation estimate tool that’s trusted by investors, tax agents, and real estate professionals. You’ll need the following information:
Date of construction
Type of structure
Can I claim depreciation on previous renovations?
Yes you can! The beauty of rental property depreciation is you can claim existing works on any structure built after 1987, regardless of who completed them. You own the building after settlement, so the plant & equipment and capital works depreciation are yours.
What can I deduct at tax time?
This is one of the rental property depreciation questions we can’t answer. If you’re looking to claim deductions for your tax return, it’s better to ask your accountant. They’ll have your existing portfolio, previous tax history, and the other information they need to give you a better answer.
What you can depreciate is another matter. For example, if a tenant has caused damage to the property and you need to conduct capital works to fix them. You’ll have to make adjustments to the depreciation schedule, but you can claim depreciation on the works for as long as you own the property.
Customers rely on Deppro to answer their rental property depreciation questions before and after adding to their portfolios. Our blog has extensive advice on a range of topics and we’re available anytime over phone, or at our offices in capital cities around Australia.
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Investors and business owners order depreciation on investment property so they can efficiently handle expenses. Many investors, though, don’t know about depreciation and how it can make their lives easier. It absolutely pays off financially, and there’s other perks as well.
Most people don’t think about taxes everyday, but the professionals do. Ordering a depreciation report on investment property removes a lot of guesswork and takes the pressure off their minds. Thanks to the experts, they can make accurate deductions for the time they own the properties in their portfolios. Deppro’s reports last forty years, long enough to hold the property and sell it on.
Access to a depreciation schedule is easy for any investor, whether they’re just starting out or played the game for a while. Companies like Deppro exist to help people at any stage of their investment game. They’ll explain how the report works, how items are categorised, and what to do after the clients get the depreciation schedule in their hands. This makes life easier, especially for newcomers, because the experts are taking care of everything.
When you ask the experts for help with depreciation for investment property, you’re also getting an education. Deppro guides their clients through the process of ordering the report and how to use it to maximise deductions. You’ll also learn what a quantity surveyor does, and what items will fall under ‘capital works’ if you ever renovate your property.
When you get expert help for depreciation on investment property you’re making less work for yourself. You get a depreciation schedule that lasts for decades and saves you worrying about accurate numbers. The report, and the expert help that comes with it, is accessible to anyone at any stage of building a portfolio. You’ll also learn a few things along the way, like how to use the report for taxes, and whether you can claim the new carpet for the office as a deductible expense (yes, you can).
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In most capital cities of Australia, apart from Melbourne and Sydney, there are still a plentiful supply of properties priced for sale under $500,000. This includes Brisbane, Perth, Adelaide and Hobart. Major regional centres such as the Gold Coast in Queensland and Bunbury in Western Australia have this abundance of properties as well. In Perth, for example, it’s now an investors paradise. There’s many properties currently listed for sale under $500,000 located within a 20 kilometre radius of the CBD.
$500,000 is around half the median house price of Sydney. Properties in theses competitively priced capital cities offer a low risk entry into the property market. There’s added potential for capital growth moving forward. Yet, it’s important that first time investors take a cautious approach to their first property investment purchase. Realistically, they should focus on buying an investment property for under $500,000.
It’s an unfortunate fact that too many first-time investors financially over expose themselves. They buy an expensive investment property that limits their ability to purchase more in the future. This is especially the case if they purchase an expensive property in the wrong location. That could result in a financial nightmare. In contrast, buying a lower priced property that’s got the potential for strong capital growth is an important building block to creating a successful property portfolio.
Lower priced properties tend to have higher rental returns. This is important in a climate of rising interest rates, with the major banks increasing rates for investors over recent months.
Issues you should consider when buying a lower priced property include:
Spend time researching all aspects of property market before even looking for an investment property. First time property investors need to consider factors like negative or positive gearing, rental returns and depreciation.
Past trends in property values will generally indicate future trends. Therefore, it’s wise to examine the long-term capital growth rates of the suburb.
Take a broad approach to buying an investment property. Most first-time property investors buy a property in their local neighbourhood because they’re familiar with the area. By taking a narrow approach to the location of the investment property, first time investors severely limit their options.
Target suburbs in lower priced areas that have a higher number of properties for sale. A simple tip is to check the internet and weekend papers. This helps investors discover areas with a larger number of property ads.
When you have selected a suburb, don’t make an emotional decision when choosing a specific home. Most first-time investors purchase a property they’d like to live in. It’s important to remember that the investment property must appeal to a tenant who’ll be paying the rent.
Check out any planning changes proposed for the suburb. Many local governments are undertaking reviews of zoning that potentially have a major impact on property values. For example, a property that was purchased for a single residential use and then rezoned by the local council, as a triplex site. The property in turn notably increases in value. The planning department of a local government can inform first time investors of any proposed zoning changes.
Check out any planned infrastructure changes in an area you’re interested in buying. For example, an upgrade of a local shopping centre or a new railway station will make a major impact on local property values.
Make sure that there are tenants prepared to rent your property. Rental income is a key factor in serving the loan. If you can’t find a tenant, then you’ll have problems keeping the investment property over the longer term.
Check your finances before you consider buying anything. If you have pre-approval finance it will allow you to move more quickly to secure the right investment property.
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