It’s a trap! Why you need to check your property taxes
THE Force is strong in tax laws, and its dark powers can trap real estate buyers, sellers and investors who don’t understand how timing affects their decisions..
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“IT’S a trap!”
Those three words, cried out in a gravelly voice 35 years ago by catfish-like Admiral Ackbar in the third Star Wars movie, have worked their way into the global psyche — inspiring countless memes, T-shirts and coffee mugs.
And, as we quickly approach the end of the financial year, anyone thinking about buying, selling or investing in real estate would be wise to listen to the Ackbar inside their own head warning “it’s a trap”.
Tax traps can surprise us any time but June 30 is a critical date, and this year it’s trickier than usual.
You won’t need The Force, just a little knowledge, and here’s a good starting point.
LAND TAX
Timing is critical when buying and selling because land tax is typically charged on your total property holdings — not including your principal place of residence — based on what you own on June 30.
There can be exemptions for owner-occupiers but people in the middle of investment transactions have no escape and can be shunted into a higher land tax bracket.
CAPITAL GAINS TAX
The family home is exempt from capital gains tax, which is paid when profits from asset sales get added to your taxable income for a year and taxed at your marginal rate — which can go up a tax bracket or two after large sales.
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You can only claim the own home CGT exemption on one property at a time, and sellers who have rented out rooms to international students or travellers via Airbnb will also pay CGT.
A CGT event is not at settlement but rather the date the contract was signed, so make sure you get the timing right around June 30 because delaying a sale might delay CGT for a year.
TRAVEL TAX DEDUCTIONS
Until this year real estate investors could claim the cost of travelling to their property for inspections and maintenance.
Not anymore. From July 2017 all landlord travel deductions were banned after the government shut the door on people claiming their annual holidays to Queensland as tax deductions.
DEPRECIATION DEDUCTIONS
Also now banned are tax deductions for depreciation of fixtures and fittings in second-hand investment properties bought since July 1. New homes and new items purchased in them can still be deducted.
These deductions are potentially worth thousands of dollars to investors, and the ATO will be watching closely — having already written to two million investors warning them of the change.
MORE ON THE WAY
Extra tax traps will emerge the next time we have a change of Federal Government as Labor has signalled that it will ban negative gearing on established homes, and lower the CGT discount from 50 to 25 per cent. Brace for more potential nasties in the lead-up to next year’s election.
With all this trap gloom, let’s finish with something lighter. Counting down, here are my three favourite Admiral Ackbar “ït’s a trap” memes …
Three: “Don’t grow up — it’s a trap!”
Two: “Your girlfriend asks you if she looks fat — it’s a trap!”
One: “Do not go to the toilet in a dream — it’s a trap!”
Originally published as It’s a trap! Why you need to check your property taxes