Significant tax and other financial benefits for a house-and-land package mean property investors should consider this option rather than purchasing an existing home, writes Richard Sheppard.
Did you know that a house-and-land package can provide up to $80,000 plus in financial benefits compared with buying an existing property of the same value – even when factoring in rental losses while construction takes place?
This stems from elements such as reduced stamp duty, higher tax and depreciation benefits, and lower maintenance and management costs – as well as having the added safeguards of a seven-year builder’s warranty and up to 24 months’ appliance warranty. If you then use this windfall to help fund other investments, the difference can be even higher.
Let’s consider a comparative example. Take a $600,000 existing investment property in NSW that is three years old, versus a house-and-land package of the same overall value (the land is $300,000 and construction costs $300,000). Assuming a six-month building period for the package deal, the key financial differences are:
- Stamp duty savings – the stamp duty on the new property is substantially lower than for the existing house as you only pay the duty on the land of $8,990, compared with $22,490 for the completed property, saving $13,500.
- Interest costs – while building the house you will have a loan and interest to pay on an investment that increases from $300,000 to $600,000. The average loan amount during the six-month period is $450,000; so six months of interest at, for instance, 4.5 per cent is $10,125. But this is tax deductible, so if your tax rate is 49 per cent, the after-tax cost is $5,163. By contrast, the net cost for the existing property are about $80 per week, or $2,080 over six months, which is only $3,083 cheaper than the new property, however the new property will be cheaper to hold once built mostly due to the additional depreciation benefits.
- Depreciation benefits – you can no longer claim depreciation for fixtures and fittings on existing properties, but you can still make the claim on new properties. This typically amounts to about $40,000. Calculated at a tax rate of 49 per cent, this gives you an extra $19,600 back in tax.
- Building ‘value uplift’ – when building a new house, you can often get an increase in property value over and above any capital growth that may occur for both the land-and-package deal and the existing property. This is called ‘value uplift’ and can be about $30,000 to $50,000 for a property worth $600,000.
With the above example, the financial benefits are $60,000 to $80,000 in total for the land-and-house deal, in addition to the other benefits of lower maintenance, customised investment design and better tenants, make it a very attractive option. As with any investment, you should seek advice from a property specialist and get access to reputable market research. Doing so can help fast-track your financial wealth.
Richard Sheppard is the Managing Director of inSynergy Property Wealth Advisory. inSynergy provides a broad-range of professional services designed to assist with all aspects of property investment. Visit www.insynergy.net.au or phone 1300 425 595 for a free chat with an advisor.
Important Note and Warning: This information is general in nature and should not be considered personal tax advice. We highly recommend you discuss these concepts with your accountant, property investment adviser and investment finance mortgage broker jointly to ensure any considered concepts are suitable for your personal financial situation, as one effect of the concept may negatively impact another part of your plan.