A dream home abroad...

Rental deductions |  Capital gains tax

Buying a property overseas is a dream many of us have – a Tuscan farmhouse, a flat in Sao Paulo or even a beach shack in Bali all sound like a fantastic idea.  Add to that a good rental income and potential for property price rises, and your dream can become a good investment.

But if you intend to earn an income from your overseas property, you will need to declare it. The rental income must be declared in its entirety on your Australian tax return – even if it's already been taxed, or will be taxed, outside Australia. The good news is there are some countries that Australia has a tax treaty with, which will mean you will not have to pay tax in that country – find out more about foreign tax treaties.

If you've already paid a foreign tax on income from your foreign property, there's a possibility you are entitled to a foreign tax offset, or credit. Rental income from overseas properties gets included in the section of your tax return called 'foreign source income and foreign assets or property'.

Rental deductions
Did you know you might be able to claim deductions on your overseas rental property? Deductions can include the local government tax on the property (what Australians call 'rates') as well as insurance, interest, maintenance any real estate agent fees, depreciation and deductions for capital works.

If the deductions you claim on your overseas property are greater than your overseas rental income, you'll have a foreign income loss – which you can use to reduce your Australian income.

Capital gains tax
Australia applies a tax to any profit you make when you sell, or dispose of, real estate both in Australia and overseas, and it is called a 'capital gains tax' – although your 'main residence' is excluded from this tax. To find out more about CGT read this article.

If you've sold a property overseas within a tax year, or made a capital loss, you need to declare this on your Australian tax return. This is even if it's already been, or will be, taxed outside Australia. On your tax return, you need to fill this information in on the 'Capital gains' section. Capital losses can be used to offset capital gains you make on other assets. And if you've already paid foreign tax on your capital gain, you may be entitled to a foreign tax income offset, or credit.

"I am renting out a flat I bought and lived in, in London three years ago, before moving back to Australia. I haven't bought any property in Australia yet, but I am thinking of selling my London flat to buy here in Australia soon."
The same rules apply to your overseas property as apply to any property owned in Australia. The London property continues as your 'principal place of residence' for six years from the date you began renting it out, and is not subject to capital gains tax once you sell it, if sold before the expiry of that six year timeframe. You can only have one principal place of residence at any one time, so you cannot own a principal residence in Australia and claim exemption from tax while you still own the property in Britain.

"I owned my overseas property for more than 12 months before I disposed of it, so is there any way I can reduce my tax?"
If you've owned your foreign real estate for 12 months and one day before selling it, you may be able to reduce the CGT you need to include on your tax return by 50% – that is, a 50% gain at the top marginal rate.

To find out more about foreign investments, See 'Investing Overseas'

Last reviewed 9/08/2012