Land tax can double the cost of owning investment property, so it is always wise to know how to legally avoid it, says Property Investment Educator and Advisor Richard Sheppard.
Land tax is a state-based tax charged to owners of property used for investment. It is generally charged to all owners except for a principal place of residence. The amount of tax charged is different in each state, although most states have a tax-free threshold, which means there is no tax payable up to a certain ‘land’ value. The value of the building is not taxed, just the land component. The Valuer General will determine the value of the land.
In NSW, the tax-free threshold for 2012 is $396,000 land value, so once you own land in excess of this value, you will be charged land tax at the rate of close to $1700 per annum, or about $33 per week for every $100,000 of land owned above the threshold. If you are already above the land tax-free threshold and are considering buying another investment property worth around $500,000 and where the land is approximately half this value of $250,000, the land tax is $4100 per annum (or $82 per week). Yes, quite a lot and well worth avoiding where practical, particularly when you consider that a $500,000 investment property would usually only cost around $50 per week net after rent and the other tax benefits. This $82 weekly extra can more than double the cost of owning such an investment property.
As land tax is state-based and most states do have a land tax threshold, the simple way to avoid it is to buy your next investment property in a different state. This will have the added benefit of helping you diversify your portfolio, however, to ensure you are not ‘di-worsifying’ your portfolio, you should also ensure where you choose to buy has every chance of performing better (at least in the short to medium term) than the state where you already own property.
If you have access to some good research and/or a good investment property buyers’ agent, this is usually quite easy to achieve. Land tax is just one of the important issues to consider when building an optimised investment property portfolio, so if you would like help with this or any other property investment issues, please contact the office.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.