Stamp duty for property transfers is a large expense, and property investors often ask if it is tax deductible. Unfortunately for property investors, you can’t claim a deduction for stamp duty straight away. However, it can reduce the capital gains tax liability when you sell the property.
What is stamp duty?
Stamp duty, also known as transfer duty, is a form of tax that State and Territory Governments charge for certain documents and transactions, including the transfer of a property.
Each state and territory have different stamp duty calculation methods. Therefore, the amount of stamp duty charged for a property sold in Victoria may be different for a similarly priced property in New South Wales. The timeframe of when stamp duty is payable also varies across states and territories.
Is stamp duty tax deductible?
Capital costs associated with acquiring a property, such as stamp duty, can only be used to offset capital gains. The exemption is when an investment property is acquired in a Territory under a crown lease. Stamp duty and costs to incur the crown lease are immediately tax deductible.
Capital costs may also include legal fees, conveyancing and pest inspection fees incurred when acquiring the property. As a property investor, it’s important to understand what your capital costs are and how they form a part of your property cost base.
Your property cost base and CGT
The good news for property investors is that as stamp duty forms a part of your cost base, it can reduce the CGT liability when you sell the property. Your ‘main residence’ (your home), as defined by the Australian Taxation Office, is generally exempt from CGT.
Fundamentally, CGT is a tax you pay on the profit made from the sale of a property. CGT is a complex topic for property investors and many factors come into play when paying CGT on the sale of your investment property such as discounts, depreciation and exemptions.
The basic formula for calculating CGT is as follows:
(Selling price – transaction costs) – (original purchase price + associated transaction costs) = capital gain (or loss)
The amount paid in stamp duty positively affects the CGT formula for the investor by increasing the cost base value as a capital cost.
What does this mean for property investors?
As a property investor, stamp duty can work favourably for you in the long term. When you decide to sell your investment property, stamp duty forms a part of the cost base and can reduce the amount of CGT payable.
It’s important to understand how your investment circumstances, capital costs and depreciation claims impact CGT liabilities to help best guide your investment strategy. For more information on available tax deductions and capital costs, visit our website at bmtqs.com.au or contact our specialist team on 1300 728 726.