Land Tax will invariably form part of every property investor’s journey at some stage or another.
Fortunately there are a number of strategies to help you minimise or avoid Land Tax on investment property.
If you’re just starting out on your property investment journey you may never of even heard of land tax before.
For those of you who own multiple properties in a single state you should have already felt the unexpected pain of land tax.
What is land tax?
Land tax is a tax levied on the owners of land each year.
Land tax applies to land regardless of whether income is earned from the land.
Who needs to pay land tax?
You may need to pay land tax if you own, or jointly own, any property in NSW, QLD, WA, SA, VIC, ACT or TAS that is not your principal place of residence, or other land exempt from the tax, as of midnight on the 31 December, where the total taxable value of your land is greater than the land tax threshold.
How can you minimise your land tax payments?
Basically every state and territory government in Australia (except the Northern Territory) imposes a land tax.
Land tax is based on the accumulative value of all unimproved land that you own, other than your principal place of residence in any particular state.
This means as you accumulate more property in one particular state the amount of land tax that you need to pay will also increase.
Example – courtesy of Your Investment Property Magazine:
You buy 4 houses with land total land value of $680,000:
Scenario 1: Invest in multiple states
Buying property in multiple states is one strategy to avoid paying land tax on investment property.
- If all 4 of the properties in the example above were owned in NSW, you would of needed to pay $4,644 in land tax for a land tax threshold of $396,000 for the 2012 land tax year.
- On the flip side if all 4 properties were purchased in different states you would not be eligible to pay land tax as you would be sitting below the land tax threshold in each state.
This strategy can also be an effective investment strategy as different markets fluctuate throughout different stages of the property cycle.
Scenario 2: Buy units instead of houses
Units will generally have a lower land to building ratio than houses. This is due to the relative size and value of the land in relation to the overall value of the property.
It’s important that you factor in the additional costs associated with holding a unit when running the numbers (strata fees + land tax).
Scenario 3: Buy properties in different entities
The final option using the example above is to buy each of the 4 properties above in a different entity.
Lets say Jack and Helen Scott owned the four properties in the example above. If Jack owned one, Helen owned one, they owned one together and the 4th property was owned under a trust there would be no land tax to pay, as each of these properties are owned by separate entities.
While this may seem too good to be true the costs of setting up and maintaining a trust might outweigh the benefits of reducing your land tax bill.
Its important to sit down with your Accountant to discuss your overall income and taxation position in relation to land tax as it too can play a role on which of the 3 strategies above you decide to move forward with.
What is the land tax threshold in each state (in 2015) and where can I get more information?
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