Property investment can be a powerful way to build wealth, but the tax side is often more complicated than investors expect.
In Victoria, especially, changing rules and rising holding costs mean tax is no longer something you can afford to think about later. It affects how much cash you need upfront, what the property costs to hold and what you may keep when you eventually sell.
Let’s look at a breakdown of the main taxes you'll encounter as a Melbourne property investor when you buy, while you hold it and when you sell.
Disclaimer: This article provides general information only and does not constitute financial, tax or legal advice. Please consult a qualified adviser for guidance specific to your circumstances.
When you buy an investment property
Land transfer (stamp) duty
The first big tax comes as you settle on your new investment property. Stamp duty, or land transfer duty, is a once-off tax based on the dutiable value, which is generally the purchase price or market value, whichever is higher.
The rate is progressive, meaning the more expensive the property, the higher the percentage you pay.
There are concessions available for stamp duty, although many are limited to owner-occupiers, so you will not qualify for your investment property. However, the temporary off-the-plan concession does apply to investors buying an apartment, townhouse or unit up until 20 October 2026.
For many investors, stamp duty is one of the highest upfront costs outside the deposit, which can be a problem if you haven’t taken this expense into your financial planning. Buyers sometimes focus on borrowing capacity, then underestimate how much cash they’ll need to complete the purchase. If you’re planning to use equity, preserve savings or keep funds available for renovations or a second purchase, this becomes even more important.
It’s also worth knowing that stamp duty is generally not immediately tax-deductible. Instead, the Australian Taxation Office (ATO) treats it as a capital cost, meaning it is added to the property's cost base rather than claimed as an annual expense.
Upfront costs
Not every upfront cost is technically a “property tax”, but some purchase costs may still matter later from a tax perspective.
Depending on the purchase, that may include:
- Legal and conveyancing fees
- Buyer’s agent fees
- Building and pest inspections
- Loan establishment costs
- Some borrowing expenses
Some of these may be deductible over time. Others may be included in the cost base of the property. The treatment depends on the type of expense and how the property is used.
While you hold an investment property
Land tax
Land tax is an annual charge levied by the state on the total taxable value of all investment land you own in Victoria. It applies to investment residential properties, commercial properties and vacant land, but your principal residence is exempt.
Victoria's land tax settings have changed significantly in recent years, and many investors cited these higher holding costs as a reason to sell in 2024 and 2025.
In January 2024, the state government reduced the land tax threshold from $300,000 to $50,000 or more for individuals, or $25,000 or more for trusts. Land tax is payable on the total value of all the land you own, rather than being levied individually on each property. That means your exposure compounds as your property portfolio grows.
Rental income
Any rent you collect is treated as ordinary income and taxed at your marginal rate. The good news is that most legitimate property expenses are deductible against that income. Costs like interest on your investment loan, property management fees, council rates and maintenance costs can all reduce your taxable income.
Depreciation is another factor to consider. There are two categories worth understanding. The first covers the depreciation of plant and equipment, which includes items like appliances, carpet and blinds.
The second is capital works, which includes expenses for building the property (if you built from scratch) as well as structural improvements, alterations and extensions to the property. The rate of deduction for these capital works is generally 2.5% or 4% per year, spread over a period of 40 or 25 years, respectively.
If your deductible expenses exceed your rental income – a common position for investors – you are negatively geared. That loss can be offset against your other income, including your salary, reducing your overall tax bill. Negative gearing is not a tax strategy in itself, but it can improve the after-tax return profile of an investment property.
Vacant residential land tax
One newer cost that can catch investors off guard is Victoria's vacant residential land tax (VRLT). If your investment property sits vacant for more than six months in a calendar year, you may be liable for VRLT. The six-month vacancy does not have to be continuous.
Short stay levy
Another more recent development is the short-stay levy that applies to short-stay accommodation (like Airbnb). The short stay levy is 7.5% of the total booking fee for each short stay.
When you sell an investment property
Capital gains tax
Capital gains tax (CGT) applies when you sell an investment property for more than you paid for it. The gain is added to your assessable income for that year and taxed at your marginal rate.
You may be eligible for a 50% CGT discount if the asset is held for more than 12 months and is owned by an individual or a trust. In the case of a trust, the discount is applied at the trust level and generally flows through to eligible beneficiaries (such as individuals). Companies are not eligible for the CGT discount.
Your capital gain is not simply the sale price minus the purchase price. Costs such as stamp duty, legal fees and some capital improvements may also form part of the property’s cost base, which can affect the final tax outcome.
CGT is triggered on the date of the sale contract, not the date of settlement. This will matter if contracts are exchanged near the end of a financial year.
Good investment property tax planning starts before you buy
Disclaimer: This article provides general information only and does not constitute financial, tax or legal advice. Please consult a qualified adviser for guidance specific to your circumstances.
Many investors only think about tax at the end of the financial year, when they're sitting across from their accountant. By that point, some of the most important decisions have already been made and cannot easily be undone.
In practice, the tax outcome often starts with the structure, the loan setup and how the purchase is funded.
That includes decisions like:
- Whether you buy using cash, equity or both
- Whether investment debt is kept separate from home loan debt
- Whether the ownership structure suits your long-term plans
- Whether the property still works once all tax costs are factored in
Getting advice early can save a lot of headaches later. A good broker, like those at AXTON Finance, will work with your accountant and financial adviser to help make sure the finance side of the strategy supports the tax side, rather than complicating it.
If you're looking to add to your portfolio or refinance an existing investment, the team at AXTON Finance can help. Call 03 9939 7576, email getabetterrate@axtonfinance.com.au or get in touch today.