Is tax boring?
Most people think it is.
But let me tell you something.
Your tax knowledge, even the basics, can be worth thousands, even tens of thousands of dollars.
And it could be the difference between keeping you in the game, amassing more wealth instead of getting dumped out.
It’s why every investor needs to know at least the basic level of tax.
This way you’ll know exactly what the implications of your decisions are, and you’ll be able to work the system in your favour.
And sure, your accountant is meant to do all this for you.
But it’s your money, and you should at least make sure they’re doing their job because if they’re not – you’re the biggest loser.
Here are some basics which all first time investors need to know about.
Stamp Duty
OK, it’s not a tax, it’s a duty.
But if it looks like a tax and smells like a tax, it’s a tax.
Stamp duty is a state government tax paid whenever someone purchases a home.
It’s a fair chunk of money too, usually in the tens of thousands of dollars.
I won’t go into any more details here because it varies so much between states.
For example, different states have different rates. No two are the same.
Some states have different rates for investment properties, and some don’t.
Some states allow you to defer it for a few months, and some don’t.
Some states have different rates for investment properties compared to your own home. And some don’t.
Some states give you a discount for brand new builds, and some don’t.
See what I mean?
It’s all over the place. And it’s changing all the time.
Your best bet is to google stamp duty calculators in the state you want to buy in and use them.
Land Tax
Just like stamp duty, each state has their own rules around land tax too.
Essentially it’s an annual tax on the amount of real estate you own, but it doesn’t include your own home.
And it’s important to know what it means for you because once your holdings in one state go above a certain level, you’re taxed even more heavily.
It’s one reason why spreading your investments around different states can be a good move.
Capital Gains Tax
This one is unusual because it’s only applied when you sell a property.
On one hand you can end up paying a massive amount of tax.
But on the other, if you don’t sell, you don’t pay.
And as long as you’ve had your investment property for more than 12 months, you only pay CGT on half the profit you make.
This means if you sell a property for $200,000 more than you bought it for, instead of paying tax on the full $200,000, you only pay tax on half the gain, and you only pay tax on $100,000 instead.
And if it’s your own principal place of residence, you don’t pay CGT at all.
Like all property taxes, there are all sorts of weird and wonderful rules which you can take advantage of. Or which you can be caught out by.
Negative Gearing And Other Tax Deductions
Now we’re into the good stuff.
What negative gearing allows you to do is claim any losses from your investment property against your income.
This means if you have to put in some money to keep your investment property, you can get some of this back at tax time.
And by the way, pretty much any money you spend on your investment property can be claimed back.
This includes interest on your loan, maintenance, property management fees, rates, insurance.
The list goes on and on.
You can even depreciate many of the items in your home, depending on how old they are.
Items like carpets, the hot water system, even the physical house itself can potentially be a tax write-off.
And as a bonus, instead of waiting until you’ve done your tax return to get your refund, you can do what’s called a PAYG Withholding Variation, and claim it back as you go in your pay.
Changing The Goal Posts
Of course, like all taxes, the rules keep changing.
Sometimes the changes are minor.
But sometimes they can be pretty hefty.
For example, some state governments see investors as cash-cows.
In particular, land tax is in the cross hairs, as are higher taxes on vacant properties.
Negative gearing looks safe though.
After being to a couple of elections recently, changes were pretty unpopular so aren’t likely to change much from now on.
And while first home buyers are being offered tempting incentives and tax benefits, these aren’t available to investors.
But that’s OK.
Anything which increases demand like these incentives mean more demand for housing across the board.
And with housing supply still chronically low, it’s good news for anyone willing to invest.
You Have Two Options (One is Good and One is Bad)
There are two things you can’t avoid.
Death, and taxes.
But if you’re well prepared, you can invest in real estate in a way which could get your tax down to almost nothing.
This is why my advice is to accept the taxes, but don’t pay one cent more than you have to.
The capital gains and the income you create along the way will more than cover it.
Don’t be scared off by them. Get the right advice, and it all works out.
Being ignorant is a bad choice though.
The good news is, there are plenty of ways to minimise your taxes.
The first one of course is using great finance professionals who live and breathe real estate investing.
And if you don’t have them on your team, our AllianceCorp network can give you access to the best.
They can help you structure your investments using trusts and companies to minimise your taxes.
Another tip is to consider diversifying between states if land tax becomes too much of a burden.
And the type of property you invest in can make an enormous difference too.
I wrote this article to open your eyes up to the tax implications of investing, both the good and the bad.
And to encourage you to take control of your tax planning so you stay in the game and prosper.
Ready To Take Control?
I’m sure you’re the type of person who likes to be in control.
And not be a victim to the whim of a money-hungry government.
This is why we always consider tax when we create a strategic plan for our investors.
In our experience, those who get on the front foot are the ones who create wealth and income the fastest.
You’re invited to spend an hour with one of our senior advisors to discover your ability to amass enough real estate to replace your income.
And to see how long this potentially might take you.
Leave your details below and we’ll get in touch with you to set up a time.