tax trick australia

tax trick australia

When talking about investment property, some folks might feel it is out of reach for them or too expensive to own one. 

Especially with rising interest rates hurting a majority of Australian homeowners, getting finance for property development can seem near impossible. 

But what if we were to tell you that there is a perfectly legal way to pay $11,700 a year for a $700K investment property in Queensland?

Keep reading to find out about this cool tax trick.

Just a little caveat before you proceed: this may not be applicable to everyone. So please chat with us if you are interested and we can help assess your specific circumstances.

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Property market over the years

With so much news speculating about interest rate rises and mortgage pain, we know you might be feeling uneasy at the moment, but we also know property goes in cycles. Property funding in the current economic climate is not necessarily out of reach. 

Owning a property doesn’t need to be as expensive as it sounds like. In fact, Australian property has seen an average growth rate of 6.3% over the last 150+ years according to 2019 Westpac data. 

And as of December 2021, Australia house prices grew 23.7% as per the latest CEIC data.

So, for a property valued at $700K, its value increases to an average of $165,900 annually based on 2021 data. 

What are the costs of having an investment property?

There are initial and ongoing costs associated with buying an investment property.

Using our stamp duty calculator, a homeowner that wants to buy a property valued at $700K in Queensland will pay an upfront initial cost of $19,828.77 inclusive of stamp duty, title search fee, transfer fee, and mortgage registration fee. 

This figure is largely determined by the stamp duty cost, and can go higher depending on which state your property is located. 

For instance, a property located in South Australia with the same purchase price will have an initial cost of around $38,797.50 inclusive of all government fees and charges. This is before building and pest inspection costs factored in, which can range between $300 to $1,100. 

Let’s just say that on average, initial costs on average amount to 5% of the entire property value. For a $700K property, this means $35,000 in initial purchase costs.

The ongoing costs can be around 1% of the total property value which include insurance fees, management costs, council rates, strata fees, repairs, maintenance, and utility costs. For a $700K property, this means $7,000 annually in ongoing costs.

How much are repayments going to be?

As of July 2022, the average mortgage rate on the 5-year fixed-rate mortgage is 5.90%. According to our home loan repayment calculator, this means that for a property valued at a 700,000, your annual mortgage costs can amount to $49,824 for the next five years. 

This calculation is based on home loan solutions where the investor pays principal and interest repayments to reduce debt over time. And given how fast the cash rate has risen the past few months, one can only assume that the mortgage interest rates can still go higher. We are watching the RBA decisions closely to give our customers the best advice on home finance.

Note: Borrowing the full property purchase price means you may have to use equity from another property or secure a guarantor loan. If you are able to get funding for property with a cash deposit upon purchasing property, your loan and mortgage repayments will be smaller.

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Monetary gains from owning an investment property in Queensland

Now, here is where we explain the benefits of owning an investment property and the legal tax trick. 

Investing in property often requires taking on sizeable home loans Gold Coast and a long-term mortgage commitment.

However, there can also be huge financial benefits that come with owning an investment property. On top of your asset growing in value over time, you can also earn income through rent.  

For instance: according to Your Investment Property, capital cities like Brisbane averaged around 5.0% on gross rental yield during the second quarter of 2022. This means that the rental income figure would be around $35,000 annually on a $700K property.

Tax deductible property costs

If you’re incurring expenses on your investment property that are higher than your income, you can leverage your marginal tax rate and claim this amount as a tax deduction.

According to SuperGuide data on Australian income tax rates for 2021-22 and 2022-23, if your income threshold is $45,001-$120,000 for example, you will get a marginal tax rate of 32.5%. This means that you get 32.5c tax payable for every dollar your investment property costs you. 

Note that this amount does not include Medicare levy or the impact of tax offsets such as LITO or LMITO.

What this basically tells us is that you will get at least a third back of whatever you pay, which will definitely help reduce the after-tax cost of managing your property. You can also get a bigger tax return if your income is higher than the specified income threshold.

Sample costs of an investment property in Queensland

Okay, time to crunch some numbers based on the figures we’ve listed above.

Purchase costs

  • Property value: $700K
  • Purchase costs at 5 per cent: $35,000
  • Total funds needed: $735,000

Ongoing income

  • Gross rental yield at 5.0%: $35,000 per annum

Ongoing costs

  • Ongoing property expenses at 1%: -$7,000
  • Mortgage interest: -$49,824
  • Total costs: -$56,824

Cashflow cost/net income: -$21,824

  • Tax refund at 32.5%: +$10,134.8
  • Net holding costs after tax: $11,689.2

Property growth

  • Average annual growth at 23.7 per cent: $165,900 per annum

Net annual benefit: $165,900 (average annual growth) – $11,689.2 (net holding costs) = $154,210.8

So if you own a $1 million property in Queensland, you will get a net annual return of $154,210.8 after your annual property holding costs of $11,689.2.

One last caveat: these figures are based on a number of assumptions, and interest rates are ever-changing. That said, there is a potential for substantial annual benefit from this hypothetical Queensland property. 

If this has piqued your interest in property ownership, talk to your local lending brokers to get funding for property development.

Ask advice from the expert mortgage brokers Gold Coast

The Reserve Bank of Australia has yet again raised the cash rate, which in turn increased the interest rates all across the country. There is a lot of uncertainty in the economy at the moment, and talking to credible finance brokers Gold Coast will definitely help in gaining clarity around your financial circumstances.

Our highly experienced Gold Coast mortgage brokers would be more than happy to sit down and discuss what is required, from first home buyers and refinancing home loans, to business finance and car loans financing. 

If you’re interested in obtaining an investment property loan and you’re not quite sure where to begin, start by giving me a call on 0421 934 033.

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