Is stamp duty tax deductible on an investment property?

Generally, stamp duty paid to transfer an investment property into your name cannot be claimed as an immediate tax deduction against rental income.

The ATO distinguishes between costs associated with acquiring or disposing of a rental property and expenses incurred in earning rental income.

Buying costs such as stamp duty and conveyancing are generally capital in nature and may form part of the property’s CGT cost base.

This means stamp duty should not automatically be treated in the same way as eligible ongoing expenses such as insurance, property management fees or repairs.

The difference comes down to whether an expense is revenue or capital in nature.

Revenue expenses are costs associated with earning rental income and operating an income-producing property. Eligible expenses may be deductible in the year they are incurred.

Capital expenses relate to acquiring, improving or disposing of a capital asset. They are not necessarily lost for tax purposes, but their treatment can be different. Stamp duty is generally an acquisition cost that may instead be recognised through the property's CGT cost base.

Purchase stamp duty generally falls into the capital expense category because it is incurred as part of acquiring the property.

Stamp duty paid forms part of the property's cost base for CGT purposes.

The cost base is used to calculate a capital gain or loss when the property is sold. Including eligible capital or acquisition costs, such as stamp duty, can increase the cost base and may reduce the capital gain calculated on sale. For example, consider an investor who buys an investment property for $700,000 and pays $30,000 in stamp duty.

The $30,000 would generally not be claimed as an immediate deduction against rental income. Instead, subject to the CGT rules and the investor’s circumstances, it may form part of the property's cost base when the property is eventually sold.

The potential tax benefit is therefore realised at a different time and in a different way.

No. The tax treatment generally depends on what the duty relates to.

This is why investors should identify exactly what a stamp duty charge relates to rather than assuming all duty associated with an investment property is treated the same way.

Even if stamp duty is not immediately deductible, the record can still be important later. An investment property can be held for many years before it is sold. By that time, locating settlement statements and records of acquisition costs can be difficult.

Investors should retain relevant records associated with the purchase, including documentation showing:

Accurate records make it easier to establish the appropriate cost base when a future CGT event occurs.

Keeping these records together from the beginning of ownership can make it easier for accountants to assess the property's cost base when it is eventually sold.

Stamp duty is only one part of an investment property’s tax position.

While stamp duty generally does not provide an immediate deduction, eligible tax depreciation may provide deductions each year during the period the property is held. Depreciation can also have implications for the tax calculation when the property is eventually sold.

Depreciation is a non-cash deduction that reflects the decline in value of eligible property and assets over time.

Depreciation is generally divided into two categories: capital works (Division 43) and plant and equipment (Division 40).

Capital works

Capital works deductions relate to the building’s structure and permanently fixed items, such as walls, floors, roofing and built-in cabinetry.

For eligible residential properties, capital works can generally be claimed at 2.5 per cent per year for up to forty years. Deductions may also be available for qualifying renovations and improvements completed by previous owners.

Capital works can also affect the property's CGT cost base. In relevant circumstances, capital works deductions that have been claimed or can be claimed reduce the cost base used when calculating a capital gain or loss on sale.

Plant and equipment (Division 40)

Plant and equipment deductions relate to eligible assets that are generally mechanical or more easily removed from the property, such as air conditioners, blinds and hot water systems.

These assets are treated differently from capital works when the property is sold. Their remaining tax value and disposal value may need to be considered separately.

Restrictions also apply to depreciation deductions for certain previously used plant and equipment in residential properties. Where deductions have been denied under these rules, the decline in value may have separate CGT implications when the asset or property is disposed of.

Because capital works and plant and equipment can affect the tax outcome differently, accurate depreciation records remain important throughout ownership and when the property is eventually sold. This can be particularly relevant when a previous owner completed renovations. Even if the original construction costs are unavailable, qualifying improvements may still attract capital works deductions.

A specialist quantity surveyor, such as BMT Tax Depreciation, can estimate qualifying construction costs where original records are unavailable and identify eligible plant and equipment throughout the property.

A BMT Tax Depreciation Schedule provides the investor and their accountant with the information about eligible depreciation deductions and the records needed to consider how those deductions may affect the property's tax position over time.

So, can you claim stamp duty on an investment property?

Generally, stamp duty is not immediately tax deductible against rental income. Instead, it is usually treated as a capital acquisition cost and may form part of the property’s CGT cost base.

The key is to identify what the duty relates to, because different types of duty can receive different tax treatment. Keep your purchase and settlement records, as stamp duty may still be relevant when your accountant calculates the property’s capital gain or loss on sale. Depreciation should also be considered as part of the broader tax position. Eligible capital works and plant and equipment deductions may reduce taxable income during ownership, while depreciation records can also become relevant when the property is sold.

A BMT Tax Depreciation Schedule identifies eligible capital works and plant and equipment deductions and provides investors and their accountants with the information needed to consider them as part of your tax return.

To find out how much depreciation you could claim on your investment property, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote online.