Investments in Real Estate are complex and can take time. However, the possibilities are endless. Unfortunately, this brings tax complications into the picture.
If you are renting property out, then your income increases and this results in you paying more income tax. Sub-dividing land and selling property can also be classed as additional income and therefore subject to income tax, but it is more commonly a case of a capital gain and subject to Capital Gains Tax (CGT).
Capital Gains Tax can apply to many assets, but in this instance, we will stick to Property. CGT is technically still a part of your income tax but can be a little trickier to calculate. When you sell property, you will need to report the profit (or loss).
CGT needs to be included in your tax return for the financial year that you entered into the contract rather than when the contract was settled.
For Australian residents, CGT applies to all your assets not just those in Australia.
It is highly recommended that you use a highly qualified tax accountant to calculate your CGT as tax is not withheld on capital gains and the calculation can be very complex.
You can deduct depreciation costs from your capital gain (or loss) in one of two ways. Diminishing value or prime cost. To see which best suits your property we suggest you contact your accountant as they have pros and cons which need to be weighed against each other.
You do not have pay additional tax on a capital loss, as you haven’t earned any income from the sale of property. You can’t deduct it from your income though, so making a capital loss doesn’t reduce your tax obligations in that year. You can use capital losses to offset capital gains in future years, which means you can reduce your tax obligation in future years.
Capital gains occur when the price you receive for selling property is greater than what you payed. Whilst it may seem simple, you may be able claim deductions based on work done to the property and other investments on it that have increased its market value.