So, you are considering buying a residential rental investment property.  Exciting news.  You find the right property and your offer is accepted.  But what happens next?  You start to ask yourself a million questions.  Whose name should we purchase it under?  Is there GST to pay?  How do we make sure we pay the correct amount of tax?    Do we need to pay tax when we sell it? 

Whether you are new to the property investment market, have one property you rent out or a large portfolio of properties, it’s vital to be aware of the tax implications on rental income or other gains from the sale of your investment property.   There is a wide range of tax rules over these properties and gaining the correct advice is essential.

It’s important to understand that there are two types of income that you may have to pay tax on when considering an investment property.  The first is the most obvious rental income.  This is the income received when you rent your property out and receive money in return.  The second is the less obvious and more complicated ‘bright line test’.  This is the tax you pay on the capital gain you make on your investment property if you sell it within ten years.  There are a few exceptions to this rule.

Let’s investigate your questions:

Whose name should we purchase it under?

The structure of your investment property is a priority to ensure that you are in the most tax effective position whilst maintaining the asset protection that best suits your situation.  There are several types of structures, and it all depends on you individually or your family circumstances.   Setting up structures is one of our specialties and we always encourage our clients to contact us when they are making a change so that we can ensure they are doing the right thing from the start.  We also like our clients to understand their structures so that they can make informed decisions going forward. 

Does purchasing/selling a property investment property involve GST?

Residential Rental Investment Properties do not involve GST in anyway at all.

How do we make sure we pay the correct tax?

The tax you pay on the Rental Income will depend on the structure of the property.  This tax is calculated each year when you do your income tax return.  There are some considerations when paying tax on residential rental income.  These include that interest on the mortgage you take for an investment property is no longer a taxable expense unless the building purchased is a ‘new-build’, and that rental losses are no longer allowed to be deducted from other business income (known as ‘ringfencing losses’).   The denial of interest deductions goes against a long-standing tax principle that allows deductible expenses to be offset against taxable income and the inability to be able to claim interest could affect your cash flow when investing in property (as does the longer standing ring-fencing rules).  With regard the interest deductions, we recommend that you make up for the loss you make in tax deductions by increasing the gross rent received.  Our calculations so far have shown that there is a minimal adjustment required to recover this change in legislation.    We offer a full income tax service where we provide ongoing advice, financials and income tax returns pertaining to your structure and notifying the income tax to pay and the correct date on which to pay it.  Additionally, we remind you when payments are due and forward check profit where required to ensure the provisional tax equates to what will need to be paid.   This means that you get to sleep easy and not lie awake at night worrying about what your tax liabilities may be and safe in the knowledge that all you tax compliance requirements are fulfilled.

Do we need to pay tax when we sell it?

Unfortunately, this has become one of the more pertinent points when purchasing residential rental investment properties.  Under the guise of the title, the ‘bright line test’, there is a tax to pay on the capital gain of your property depending on when you purchased it.   All property currently purchased is subject to a 10 year ‘bright line test’ period.  This means that you will pay tax on the capital gain made on the property at whatever rate applies to the structure of the property should you sell it within a 10 year period, unless it is a ‘new-build’ to which the former 5 year ‘bright line test’ is applied.  It is imperative to take note of what tax you should be prepared to pay should you find yourself in the position of selling a property within these time limits and you should also be aware of changing the structure of the property which could also result in triggering the restart of the test.  We work very closely with clients in this regard, ensuring they are aware of the period of time their properties are taxable and being available to discuss any decisions to sell ahead of time.

In this age, when simplicity is being sought via web applications, it has never been more important than to be equipped with the right advice to ensure you are ahead of the game when it comes to your residential rental investment properties.  This advice should be tailor made and individual and we care about the outcome.