Question: My wife and I have one investment property and are looking to get a second one. I was looking at getting the second one put in my name only (is this beneficial for tax purposes?) and is there any way of transferring the first one into one of our names for the same reason (tax purposes, if possible)? Also, which is the best way to ensure we get a high return at tax time based on the type of investment property we buy? Should we get an established house or something that has just been built? I’m not sure which one would bring back a higher depreciation.
Answer: When purchasing property, from a tax perspective it is important to consider the negative gearing tax aspects of the investment property and the relevant state land tax implications. Therefore it is imperative that these two taxes are calculated prior to the purchase and used in the determination of which entity or name the property be purchased in.
In general, without considering land tax for this example, a property that is negatively geared (that is the expenses incurred in holding the property are greater than the rent received) should be placed in the name of the spouse that is earning the higher wage (preferably the higher tax bracket). This will potentially result in a greater tax refund or minimisation of tax. One needs to be mindful of the longer term capital gains issues.
As for transferring an investment property from joint names into one name (either of the spouses), it may be the case that the transfer of the property to the spouse with the higher wage will result in a greater tax refund or minimisation of tax, however, from a tax perspective this would be deemed as a sale of the property and capital gains and stamp duty would be potentially be applicable. One would need to weigh the commercial advantage of such a decision.
It is true that depreciation is an important consideration at tax time. There are effectively two types of depreciation applicable to a property. These are depreciation on the building and depreciation on the assets within the building. For the first to apply, the building must have been constructed after 17 July 1985. It is fair to say that even older buildings can be depreciated (generally 2.5%), however the cost of a building in 1985 would be considerably less than the same building built today and therefore the capital works depreciation (as it is known) would be significantly lower for the older building. Items within the building are depreciated at different rates and are depreciated at their cost. The light fittings of an older home may be valued less than newer light fittings and therefore the depreciation deduction may be less.
- Answer provided by Dom Cosentino, Kennedy & Co Chartered Accountants (kennedy.com.au)
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