When it comes to buying an investment property, there are plenty of costs involved in the process. Inspection reports, legal work, loan applications, title transfers… and that not-insignificant cost of the actual property.
But arguably, the most annoying expense you’re gouged with as a buyer is stamp duty. One of the most common questions we get is about stamp duty on investment properties. People most commonly want to know if they can claim the stamp duty on an investment property as a tax deduction, along with the other costs associated with the investment.
Unfortunately, you can’t claim the cost of stamp duty as a tax deduction (more on ‘why not’ in a little bit) but there is some good news to share about your tax liabilities when you sell your asset.
What is Stamp Duty?
The simplest way to define stamp duty is that it’s a tax on property, plain and simple.
Stamp duty is a massive source of revenue for state governments and there aren’t many reasons for it to still exist today.
Taxation reviews over the past decade or so have suggested dumping it, including the Henry Tax Review in 2010, one of the most significant reviews of the Australian taxation system ever undertaken.
In 2020, former treasury secretary Ken Henry appeared before a parliamentary review (yes, another one) to re-state his case for dumping the much-maligned stamp duty tax and offer an alternative way the states can continue to collect this revenue. The Sydney Morning Herald reports:
“It’s a big obstacle for first home buyers – saving for the deposit and then saving for the stamp duty – it’s just nuts,” he said. “Particularly in Sydney, it’s a massive bill they’ve got to pay.”
“If stamp duty were abolished and replaced with an annual land tax, of course, over a 15-year period – or whatever it is – they’ll end up paying the same amount. But they don’t have to come up with all the cash up front.”
And research has found that massive stamp duty add-on cost has an impact on the quality of living.
The tax, based on the value of the property, adds significantly to the price of property at a time when cracking the market is hard enough.
It also dissuades people from moving to certain areas and therefore increases commute times and forces people to sacrifice their proximity to family, work and schools, among other things.
And it acts as a barrier to older Aussies’ downsizing.
Most of the Real Estate Institutes (notably, REIV, REIQ and REINSW) have been lobbying hard for many years for the State Government to review stamp duty. They argue in favour of replacing stamp duty with a long-term land tax.
The peak bodies say that stamp duty is a volatile, regressive tax that doesn’t provide a consistent, predictable level of revenue for governments and is a significant impost on buyers, preventing many from getting into the market.
These peak bodies correctly argue that a thriving property sector is the backbone of the states’ economies. They argue that stamp duty contributes significantly to housing lack of affordability, locking many Australians out of the market. If more Australians could access home ownership, more houses would be sold.
Stamp duty revenue rises when there is a surge in house prices (as there is now) and plummets when the market softens, leaving a significant shortfall in state budgets that must be made up elsewhere.
A tax bill of tens of thousands of dollars for one transaction (data shows that in 2020 the median stamp duty bill in NSW was $35,000) is unaffordable for most young and first home buyers.
The ACT is currently leading the way on stamp duty reform and has made the leap from a once-off payment to a long-term incremental payment over the duration of the ownership, proving that it can be done.
Claiming stamp duty on an investment property
Being a property investor opens you up to some pretty good perks, especially when it comes to tax deductions.
You can claim a number of those costs I mentioned – legals, rates and inspection reports to name a few – to reduce your taxable income.
Given stamp duty is an expense directly related to your investment, you should be able to whack that in next tax time… right?
Claiming stamp duty on an investment property is seen by the tax office as a non-starter. The ATO considers that huge chunk of change – the stamp duty on your investment property – to be part of the cost of acquiring the property.
In their view, it’s part of the base cost of the property and given you can’t claim the purchase price… you can’t claim the tax either.
It’s not very fair, but that’s the way it is.
The good news around claiming stamp duty on an investment property
There is a bit of good news on the stamp duty front.
But you’ll have to wait for it to materialise – that is, when you sell your house. Yes, the glimmer of good news is that stamp duty when selling a house can provide some tax benefit.
You can put the outlay of stamp duty towards lowering your capital gains tax liability when it comes time to selling your property.
Just as the taxman counts it as part of the base acquisition cost, so can you on the other end.
Let’s say you recently paid $1 million for an investment property in inner Melbourne in June 2021.
The stamp duty, or transfer duty, on that purchase – because it is an investment property – is currently a staggering $55,000 – another reason why it needs to be axed!
If you sell it in five years for $1.2 million, then the capital gain is $145,000 – not $200,000 – which will reduce the tax you will have to pay. That’s something, right?
Getting the right financial advice about stamp duty
Investing in property involves myriad costs including a big lump sum to the relevant state government in the form of stamp duty.
While there’s long been debate about whether it should be axed, the reality is it’s probably not going anywhere anytime soon.
The world of banking and finance can be a pretty daunting one for both novice and sophisticated investors and since our establishment in 2002 we’ve focused on providing outstanding service and business standards.
This approach has been vindicated many times by our multi award-winning approach.
So, if you’d like to understand more about stamp duty, why not contact Intuitive Finance located in Melbourne today to ensure you have the right information and expert support on your side from the very beginning.
If you’d like an expert to teach you more about stamp duty and tax or if you have any other questions, please just contact us directly and we’ll be in touch.
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.