One of the most common issues I see happen to investors who focus on buying in one location only is land tax.
This is especially so if that market has had a strong price growth period, so the values of their holdings increased significantly.
Perhaps at the start of the year they were under the threshold, but by the end they had tipped over and were now liable to pay the relevant State Government more of their hard-earned money.
The key is, of course, is that it doesn’t have to be that way.
In fact, I have yet to pay one cent of land tax in my own personal portfolio, and these are the reasons why.
Diversity is key
Like so many other elements of property ownership in Australia, land tax is state-based with each having different payment thresholds.
While that might seem a little painful because of the different value limits, in reality it is a situation that can be financially beneficial for investors.
You see, my portfolio is spread across a number of different states, where I have yet to hit the thresholds.
Ditto, with our clients, who invest in real estate in the best markets across the country.
Not only does that mean they’re making the most of market conditions in diverse locations, they also are able to keep under the relevant land tax considerations in each state.
Of course, it’s important to realise that land tax is based on the land value – not the purchase price of the property – so there are opportunities to buy a number of properties in one location without worrying too much about paying land tax.
As well as buying in diverse locations, investors can also opt to buy in different names.
For example, my personal portfolio has a mix of properties in my name and in my wife Sophie’s name, too.
That’s because land tax is based on an individual’s assets and taxation position.
By owning property in different names, within the legal limits of course, you can minimise land tax as well.
A statement I’m often initially told by our many clients aged between 20 and 40 is they want to “set up a trust”.
Usually they say it’s for “protection and taxation purposes” but they often misunderstand the positives and negatives of using trusts as an ownership structure for property.
Now that is a blog for another day, but in short, buying property in a trust may mean you have to pay land tax from day one as there is no threshold as such, plus there are significant costs involved in setting up and maintaining one to boot.
Another diversification option when it comes to land tax, however, could be dwelling type.
While I am currently recommending clients buy established houses because of the favourable market conditions in many locations, established townhouses or units could be an option for people with affordability constraints.
In fact, buying an affordable house with development potential could achieve the same purpose in the future now I think about it.
What I mean is that most buyers can’t afford a house in Coogee, for example, but they could purchase an established unit, plus those types of dwellings are always in strong demand from renters in that location as well.
At the end of the day, we all have to pay our fair share of tax during our working and investment lives.
While our contributions help support those less fortunate than ourselves, that doesn’t mean that investors can’t be strategic with their location selections that will improve their overall chances of capital growth – with a happy by-product being a slightly smaller hit to their back pockets in taxes.
State by state land tax information