As speculation grows regarding the state of the property market this year, we are seeing lots of renewed interest in property investment. If you are thinking about expanding your property investments this year, here is a reminder of the key issues that you need to understand to maximise your chances of success.
1. Structure, Structure, Structure
With all investment assets, the important thing to remember when it comes to tax is “if you own the asset, you pay the tax”. For this reason, how you structure a property purchase is critical. Think of it as the location, location, location of the tax world.
Some of the factors to consider when choosing a structure include:
- Will you hold the property for a short or long time
- Who will benefit from any tax deductions available from holding the property
- Do you have available family to share any future capital gain
- Do you plan to use the property for personal use
Based on your particular circumstances, the common structures that may be recommended to you for property ownership include:
- Owning in an individual name
- Owning in a family trust
- Owning in a self managed super fund
Ultimately, the choice of structure is a strategic decision that should be tailored to your current and expected future circumstances. Make sure you seek the right advice to ensure you get the most out of your investment.
2. Taxes to be aware ofThere are some hidden costs in purchasing and holding a property that need to be considered when determining the amount of money you have available for investment. Your advisors can also assist with this to tailor the purchase of the property to your needs.
Some of the key taxes to consider include:
- Stamp Duty on purchase – your solicitor is the best place to start regarding the level of stamp duty payable and any concessions that may apply.
- Land Tax – Depending on who owns the property, its location and your other property investment holdings, land tax may be payable. This is a yearly tax levied on the unimproved value of your land. Getting the right advice about structure and the applicable land tax will help to ensure you manage this cost.
3. Negative Gearing and the value of your property
We often see some confusion about how tax applies to property ownership, so let’s revisit gearing and how it will impact on your return on investment.Gearing is where you use a level of debt to assist with purchasing the property. The level of gearing determines whether the property is positively or negatively geared. Positive gearing is where the property has a debt level such that the income from the property does not exceed the expenses. Therefore, the ownership of the property delivers a cash surplus to the investor.
Negative gearing occurs where the income from the property, being the rent, is not sufficient to cover the costs of owning the property so the investor will be required to contribute funds to cover this loss.
Often, people are attracted to negative gearing as this will create a loss for tax purposes and will therefore help to reduce your yearly tax bills. It is critical to remember, however, that a paper loss is a real loss. In other words, when you are negatively gearing a property you are actually losing money. If the property is not increasing in value by more than the net loss, you will end up worse off.
So when thinking about negative gearing, whilst the tax savings in the short term are attractive, if you are to increase your overall wealth, these must be offset by the future capital gain on a well chosen property.In summary, property investment is a well used tool to assist with wealth creation. By getting the right advice before you sign on the dotted line, you will ensure that you maximise your chances of success.