Property tax traps for investors caused by June timing issues

Capital gains and land tax can dramatically impact investors’ wealth if they make a timing mistake. Here’s how avoid the most common mistakes.

Australians who are buying or selling real estate are being urged to check the tax impacts or risk being slugged thousands of dollars.

There are capital gains tax and land tax timing issues that can affect people who hold multiple properties, and soaring house prices in the past two years have made its potential hit even more painful.

Land tax is levied on almost all land owned apart from a family home or farm, and in a majority of states it is based on land held at June 30. However, Victoria and New South Wales apply their land tax assessment on December 31 and the Northern Territory has no land tax.

The tax multiplies dramatically the more land you own, and can be charged at 1-2 per cent of the value of the total land held above a certain amount. The rules and thresholds vary between states and are outlined on state revenue office websites.

Chartered accountant Mark Gellert, a senior manager at dmca advisory, says it is common for people to buy a new residence while still owning their current residence.

Understand the potential tax traps when buying and selling real estate.

“As you are only eligible for exemption on one principal place of residence and own both properties as at 30 June (or your state’s relevant date), land tax may be imposed on the new property,” he says. Gellert says there may be exemptions or waivers in some circumstances.

“If you have knocked down the new residence in order to build your dream home, you may be eligible for an exemption of up to two financial years while undertaking the building work,” he says.

As land tax is a state, rather than federal, impost, it is unrelated to income tax – apart from giving property investors who pay it a tax deduction.

H&R Block director of tax communications Mark Chapman says investors need to be aware.

“If you are in a position where you own multiple properties, you may well have a land tax liability,” he says.

“Not a lot of people give any thought to land tax – until the bill arrives.”

Property investors also should consider capital gains tax, where the profit on a sale gets added to their taxable income in the financial year it’s sold – usually with a 50 per cent discount if held for more than 12 months.

Trying to delay a CGT bill until next financial year by delaying a property’s settlement won’t work.

“It’s the date of the contract that the capital gain arises,” Chapman says.

Investment tax specialists recommend investors avoid selling two properties in the same financial year, because profit on the second property could be taxed completely in the top tax bracket – minus the 50 per cent CGT discount if that applies.

And serious investors can lessen the impact of land tax by spreading their property purchases across different states

Originally published as Property tax traps for investors caused by June timing issues