Understanding property taxes

Capital gains tax

Capital gains tax only applies when you sell your property. There is a 50% discount on capital gains tax for investors who hold their property for more than 12 months. Other mitigating factors include depreciation; whether rental yield is running at a loss; whether you purchased the property through a SMSF, or whether you’ve lived in the property for a period of time and if the property was purchased before a certain time period it may be exempt under certain scenarios. We’ve written in detail about how depreciation is a valuable tool to offset capital gains tax. So there are many ways to minimise capital gains tax and these need to be part of your strategy when purchasing a property.

Of course the simplest way to avoid capital gains tax is not to sell the property. Instead you could access its increase in value by re-evaluating the property with a bank and accessing your equity to purchase more properties. By piggybacking one property to purchase others, you can build a portfolio without triggering a huge tax bill or agent’s selling fees.

Stamp duty

Stamp duty is a tax you have to pay upfront when you purchase the property. This uses a sliding scale of taxation based on the value of the property. It’s a state tax so will vary in each state but generally you can assume that the higher the value of the property, the higher the stamp duty will be. One advantage of building your own home, or purchasing house & land package is that you only pay stamp duty on the land component. 

Land tax

This is a tax levied on all owners of land once a year, regardless of whether any income is earned from the property. It’s a state tax that most states in Australia impose. However, there are exemptions and it’s usually not imposed on the home or primary residence. It’s generally brought upon vacant rural land; commercial property; company title units or holiday homes and other kinds of properties. There are also thresholds for each state in terms of where you get taxed. Putting properties in your partners name or in buying property in a different state, can reduce the amount of land tax you are paying (only makes sense if that is a sound investment decision of course). 

Strata fees

Obviously you only incur these fees if you have bought into an apartment block that is run by strata. It’s certainly worth carefully researching the finances and history of any block that you buy into. For instance: does it have an adequate sinking fund, or is the sinking fund perilously low on money? Are you likely to be up for special levies? What condition is the block in and how much repair or maintenance work is likely to be needed in the near future? All this will help you budget and prepare for any hidden financial nasties. And, once you have bought into the block, remember you have the right to contest any planned strata fee rises or special levies if they don’t seem substantiated.

Council rates and water

There’s simply no escaping these taxes. Every property owner will incur them no matter where they live or what kind of property one has. They will vary from location to location. There’s also a substantial difference between the kinds of rates and taxes you’ll be levied in the city to in the country. Often rural councils will charge higher rates due to the vast geography of the area and the hefty cost of supplying services. As with strata fees, don’t be afraid to monitor new fees or levies or question them.  In a recent case in MacKay, the local council was charging investors higher rates than other residents. This was subsequently declared illegal after the irate investors went to court.

So, just as you will thoroughly research an area’s history, economy, infrastructure and property prices before buying into it, so you also need to meticulously comb through all the details of the likely taxes you’ll face and look for ways to reduce them. It’s through having all the information that you’ll have greater strength as an investor.