Stamp duty is one of the largest expenses involved in purchasing an investment property, so it’s unsurprising that investors often ask if it’s tax deductible. Stamp duty is a form of tax that state and territory governments charge for certain documents and transactions, including the sale of a property.
Each state and territory have different stamp duty calculation methods so 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.
Unfortunately, property investors can’t claim a tax deduction for stamp duty immediately, though it can reduce the capital gains tax (CGT) liability when you sell the property later on. The exemption is when an investment property is acquired in a territory under a crown lease. An example of this is Canberra where stamp duty is immediately tax deductible for investors.
Though for typical investment property transactions, capital costs like stamp duty are included in your cost base and can only be used to offset CGT. CGT is a tax you pay on the profit made from the sale of a property. Several 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:
(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 by increasing the cost base value. 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.