Investing in real estate is a great way to build wealth and generate income, but it’s important to understand the taxes and other costs that come with buying and owning property. In this post, we will understand how to mitigate more of your tax bill and how you can pay less tax when you buy investments.
One of the largest taxes investors will come across is stamp duty, this is a tax imposed by state governments in Australia on the transfer of certain types of assets, including real estate. For investors, stamp duty is a problem because it increases the cost of investing in real estate, reducing the potential return on investment. This is particularly true for investors who are looking to purchase multiple properties, as the stamp duty costs can quickly add up. The funds required to pay stamp duty are required upfront and are not tax deductible like many other investment expenses. So ideally lets try to avoid this tax as much as possible.
Buying good land:
A way to significantly reduce this large tax is by buying land. The stamp duty is lower when purchasing land than when purchasing an established property because the cost of the land is less than the cost of the established property. This means that buying land can be a more cost-effective way to enter the real estate market, especially for first-time buyers or investors on a budget. For example, when buying a block of land for $250,000 in Victoria, the stamp duty component will be approximately $10,070. Then, you can add value through construction to create a brand-new property, which gives you a very high depreciation schedule. Lets say the cost to build a property is $350,000 the total cost of the property = $600,000 if you were to buy this property as an established home, you would have to pay stamp duty on the full purchase price which would be approximately $31,070. That is a significant amount of your deposit taken up in taxes!
Depreciation Schedules:
Depreciation is a tax benefit that allows an investor to claim a deduction for the wear and tear of the property over time. This can provide significant tax savings for you, as it reduces your taxable income for that year. For example, a $350,000 home built in Victoria will be able to reduce the investor’s taxable income by around $15,000 in its first year of ownership. Each year after, this depreciation allowance will decrease, however, it will still be significant.
It’s important to note that depreciation is only applicable for income-producing properties and is based on the Australian Taxation Office’s guidelines and rules. It’s also important to consult a Tax Professional for specific advice related to Depreciation and your individual case as the rules and regulations change over time.
In conclusion, buying land instead of established property can save you money on stamp duty, and depreciation can provide significant tax savings for investors. This is how I ensure that more of my money is going towards the investment and not to the government. If you would like to learn more about how to find good blocks of land and quality builders to work with, feel free to reach out, and we can discuss it further.
Disclaimer: The information provided in this article is solely the author’s opinion and not investment advice – it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions. Do conduct your own research and reach out to financial advisors before making any investment decisions.
