Capital gains tax is tax on the profit made on the sale of any capital item.
Capital gains tax applies in the financial year a capital asset is sold. It is important to note that the date of the actual contract is the purchase or sale date for capital gains purposes, not the settlement date. This becomes relevant for sales made towards the end of the financial year, which settle in the next financial year.
There is no actual rate of capital gains tax. The capital gain is calculated as the difference between the sale price, less associated expenses, such as solicitor fees, agent commission, etc. and the original purchase price, plus associated costs of purchase including stamp duty, solicitor fees, building inspections, etc.
Once you have calculated your actual gain (for assets held by individuals over 12 months) there is a 50% discount resulting in the gain being halved. The discounted gain is then included in the investor’s tax return as assessable income, along with their employment income and any other income. The normal marginal rates of tax then apply.
The exception to capital gains tax is in relation to selling a principal place of residence property, where the sale is capital gains tax-free. For homes on land over two hectares, not all of the gain will be exempt. Gifting a property to a family member will generally not exempt you from capital gains tax, except in limited circumstances, such as via a will or on family breakdown. The sale price of a ‘gifted’ property will be deemed to be the market value at the time of the transfer of the property.
The main reason to consider furnishing an investment property would be to increase the annual income return.
A furnished property can provide these additional returns above the standard rent, as tenants are willing to pay more for the convenience of moving into a furnished property and possibly being able to rent for a shorter-term.
While furnished properties can attract long-term tenants they are more often than not rented to tenants looking for a shorter-term tenancy, such as three months. Less than three months is often considered a holiday rental.
Short-term tenancies, allow owners the flexibility of moving prices with the market at different times of the year.
Furnished properties are the perfect solution for longer-term vacationers, students, expatriates working from overseas on contracts, or people going through a relationship breakdown. Short stays might be the perfect solution for property investors who also want to use the property as a vacation home.
There can be fewer tenants wanting to rent a furnished property. However, there are often less furnished properties, which can increase the demand and rent achievable.
Depreciation is always a good advantage. Other tax advantages may depend on the type of dwelling it is (separate house or an apartment in a managed complex) and your tax advisor will need to advise you on these. Furniture can typically be written off at a reasonably rapid rate or often immediately depending on the purchase price.
Renting a furnished apartment means you’re going to have to buy all of the furniture and it will need to be updated from time to time, repaired and cleaned, all of which is an ongoing cost. To reduce replacement costs you could consider providing the furniture only without kitchen utensils appliances and bed linen.
As furnished properties are often considered more short-term rentals, it will result in increased let fees and advertising costs and there could be greater vacancy periods with the higher turnover in tenancies.
Interest rates are the lowest they have ever been, however, many people are still finding it challenging to purchase a property on their own, especially the younger generation. If you have a family member or friend looking to enter the property market or eager to climb up the property ladder, the solution could lie in buying property with family and friends or utilising current equity in the family home or investment.
While there is always the chance of unforeseen issues with those close to you, there are also many benefits from teaming up with your loved ones to acquire a new property.
There is a better chance of home loan approval – Having two or more people on the home loan application can facilitate the process and increase the chances of being approved as two incomes are generally better than one.
Split expenses – Buying a property with someone else means you’re splitting all the costs, making it easier and more affordable.
Unpredictable circumstances – A fall out with a family or friend is not uncommon, so it is important to remember to separate business from pleasure and not let personal issues get in the way of your property ties.
Selling – Unforeseen events can have you or the other party/s wanting to sell up. As the process of selling can often be complicated or a lengthy one, you need to make sure that you have a strong relationship with the person you are buying with.
When entering into any type of financial agreement with family or friends, it’s wise to get a co-ownership agreement drafted by your solicitor to avoid any disputes. This agreement will outline any obstacles you may face such as who chooses tenants, property managers or what happens when one of you decides to sell. [Refer to our Mar – Apr issue]
If you have a family member or friend that is looking to purchase a property we are here to assist and offer advice.
This is not a happy topic to write about, but one that is reality.
If you or someone you know has recently divorced or are going through the separation process (and you own property) then you are going to have to determine how to administer or divide your shared property investments, which more often than not will involve lawyers.
We understand that this process can be overwhelming and stressful.
During these times it is also important to note (from previous experience) that for any changes to occur to rental payment bank account details we mus t have written and signed instructions from all parties, which is part of our standard agency processes.
If you are reading this article and you are the two who are still married, or if you are considering getting married we would encourage you to seek legal advice on a co-purchase or ownership agreement when buying a property with a partner as it can serve to protect both parties. It outlines who pays the bills, who is liable in the event of a relationship breakdown, and how one of the parties can sell their share of the property (if you even want that to be a possibility).
If you invest hundreds of thousands of dollars on a home, even millions, you may want to make sure that you are protected no matter what. You don’t want to find out that you don’t have any claim to the property after the relationship has broken down and then lose all of the money you put into the investment.
When you decide to purchase property with someone else, be it a significant other, family member or a group of friends, you have the choice between a ‘Joint Tenancy’ or a ‘Tenancy in Common’. In a Joint Tenancy, each investor in the property has equal shares and equal responsibilities, regardless of how much they put towards the home deposit or how much they pay off the mortgage.
In the event of a separation that requires you to sell your investment, both parties receive an equal share of the profits (or are liable for an equal share of the losses). If you are married, this might be the best choice based on your shared finances.
If you have purchased a property through a Tenancy in Common, you may have uneven shares in the home. If you paid 70% of the deposit, you will be paying for 70% of the mortgage and the bills, and you will receive 70% of the profits. Your partner, on the other hand, will only receive 30% of the profits.
If you need to sell or if you find yourself in this situation, our team of experts are here to offer confidential value-added advice on the sale process as well as a free ‘no obligation’ appraisal (if required) to assist in listing the property for sale to achieve the best possible price.
We also recommend that you seek professional advice from your lawyer and accountant.
The biggest mistake first time property investors make is not conducting a thorough background check on tenants. But that is not the only mistake. Here are nine others.
Rents are inflated, thereby reducing the number of potential tenants. By lowering the rental price by a small amount, a landlord can substantially increase the pool of potential tenants from which to select a reliable person to lease the property.
The necessary contracts are incorrectly completed, names are spelt wrongly and the contract is not correctly witnessed. These errors can make the contract invalid.
Landlords make verbals agreements on matters such as rental payments which are invalid if they are subsequently challenged by the tenant.
A common mistake is failing to properly lodge the bond money or failing to collect the right amount of bond money. Bond money is critical if the tenant breaks the lease or causes damage in the property.
The landlord develops a friendship with the tenants, which makes it difficult for them to take action if the tenant breaks the contract. Leasing a property is a commercial arrangement and landlords should take a professional approach to it.
Maintenance problems have to be addressed quickly to ensure good tenants remain happy. Landlords who argue with tenants over maintenance problems may find it difficult to retain good tenants or maintain regular rental payments from their tenants.
Landlords follow the wrong procedures when terminating the lease. Generally, not enough notice is given or the notice given is not in writing. There are set procedures that must take place if the landlord wishes to evict a tenant.
Not taking out the necessary insurance cover to protect the landlord if there are problems with the tenancy.
Not fully claiming tax depreciation benefits which can be equivalent to 60 per cent of the total purchase price of the property.
If the rent for every property we owned covered the mortgage payment, we would probably be far more relaxed. But for the majority of investors this is generally not the reality. More investors than not, are relying on the weekly rent to meet payments and expenses and we understand the importance of achieving the highest possible rent.
The achievable rent on a property is no different to the sale of a property. It is determined by the condition or presentation of the property, inclusions, location and more importantly, the supply and demand of tenants at the time.
When determining the rent of a property we must take into consideration the properties on the market at the time. If the property becomes available during a period of time where there is low tenant demand and a high number of vacant properties the rent achievable can go down.
It is for this reason that it is important to know the market conditions and ensure that your investment property stands out over all others when trying to secure a tenant.