What you can claim in tax deductions when selling a property is a question that we’re often asked here at Upside Realty. Below is your guide to navigating tax deductions if you sell a house in Australia:
You’re not eligible to make deductions on your primary residence
When you sell your main residence, you’re not liable for capital gains tax, but you also can’t make any tax deductions. According to the ATO:
“Generally, you don't pay capital gains tax (CGT) if you sell the home you live in (under the main residence exemption). You also can't claim income tax deductions for costs associated with buying or selling your home.”
This may change if you live in a house you’ve previously rented or vice versa, and also if you use any part of the house to generate income – you’ll be liable for a capital gains tax for the portion of the time that you lived there:
It’s important to hang on to any records, receipts, and invoices relating to your house – if you do decide to rent all or part of it you’ll pay the right amount of tax for the period for which it’s been rented.
RELATED: Tips for selling your house quickly
Investment property tax deductions
Your eligible tax deductions change if you’re selling an investment property since these properties attract capital gains tax (CGT) – one of the costs of selling a property to factor in when you’re planning your next move. When you sell these properties, you need to establish the cost base (generally the amount you acquired the property for), which can include other costs associated with buying the property, holding and selling it – these are your deductions.
You may be able to include in the cost base any payments you’ve made towards the maintenance and upkeep of the property while it is being rented, called capital expenses. These can reduce the amount of CGT you’re liable for since it narrows the gap between the cost of the property when you purchased it and the amount for which you sell it.
Capital expenses include:
- Conveyancing costs paid to a conveyancer or solicitor
- Title search fees
- Private appraisal fees (when conducted by a solicitor)
- Stamp duty on the transfer of the property
Note that any real estate management fees don’t factor into capital expenses. Once the cost base is established, then the difference between that and the sale price is used to calculate your tax liability.
More importantly, you can only claim for costs incurred while the property was being used to generate income – so, if you renovated before renting the property, or if you made improvements while living there, these costs aren’t eligible deductions.
If you make a capital loss, you may be able to use this to offset other capital gains you’ve made throughout the year.
Are there any other investment property tax benefits?
There are a number of other rental property deductions you can claim if you own an investment property. Keep in mind that to claim these deductions, you need to either be currently renting out your property or be actively advertising it for rent.
If your investment property is being rented out or advertised for rent, you can claim deductions for some or all of the following expenses in the financial year they were incurred:
- Repairs and maintenance to your investment property
- Management and maintenance costs, including strata fees, council rates, water rates, cleaning, gardening and pest control fees
- Insurance for your investment property, including building, landlord and contents insurance
- Interest on your mortgage and borrowing expenses
- Advertising for tenants and property management fees
- Accountant or tax adviser fees
Other larger expenses such as major renovations may be considered “capital improvements” by the ATO, in which case they need to be claimed as deductions over several years rather than in the same year they were incurred. Talk to your tax adviser to find out what applies to your situation.
What is negative gearing and how does it impact my taxes?
If the income you make from an investment property is less than the mortgage repayments and other expenses, it is “negatively geared”.
The ATO allows investors with negatively geared properties to deduct any losses they make from their taxable income. This works to lower your total taxable income, and consequently, the amount of tax you will need to pay.
Although making a loss on an investment property isn’t ideal, some property investors choose to hold on to negatively geared properties with a view to profiting of a property’s capital growth when they sell. In this case, negative gearing tax benefits allow an investor to limit their losses until it’s the right time to sell.
So, if you’re considering selling an investment property in Australia that isn’t generating as much income as expected, it’s worthwhile talking to a tax adviser about reducing your tax liability in the interim.
Ready to sell? Request a free online property value report, which takes just 30 seconds to claim but will give you an in-depth look into property sales in your area for a rough idea of the potential value of your home.