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Residential Property Taxes

Residential Property  Taxes

In light of the perceived and often flouted poor global economic conditions and the constant peaks and troughs of the stock market, property development is considered by many to be one of the most stable investments. The number of people investing in property has increased considerably since the Australian government has allowed the inclusion of property in Super funds; this coupled with various state governments offering incentives for new homeowners, this trend is here to stay.

Even though investing in the property market can be financially rewarding, many investors commit blunders which hinder building financial success. Many of these blunders are because of the investors’ lack of knowledge regarding residential property taxes as set by the Australian Taxation Office (ATO). Residential property as a primary place of residence is generally exempted from taxes. However, undertaking a property development and the intended use of the property after its development influences if the property is taxable. Here are some of the common tax pitfalls you should avoid when investing in property development.

Overview of the ATO policy

Residential property is commonly exempted completely from taxes. But if you plan any developmental project on the residential property such as a renovation or modification such that it generates profit, the property may be taxable. For example, the property is taxable if it is intended for the purpose of running a business. In this case, it may be subjected to income tax, GST (Goods and Services Tax) and possibly capital gains tax (depending on the structure).

Tax policy for your home

The home that you live in (i.e. your primary place of residence) is usually not taxable. But if you rent a portion of the dwelling or use it for any other commercial activity or if your home stands on a land greater than 2 hectares, it might be taxable. The same applies to inherited dwellings. Any sale of residential property (not your primary place of residence) is also usually subject to capital gains tax.

Tax policy for residential land

Vacant land is generally considered as a capital asset and is subjected to capital gains tax. If you purchase the land for business purposes such as for resale, such land is considered as trading stock and the revenue generated is considered as ordinary income, which is subject to GST. The same rule applies to the subdivision of land.

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