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THINGS YOU SHOULD KNOW BEFORE BUYING A PROPERTY

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Buying a property is one of the biggest decisions you’ll ever make. Either you are buying for residential or investment purposes. The following is a list you might want to check to avoid possible future issues.

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If you are buying your own residential property:

Financial issues:

Can you afford it?

  • You need to understand your limit. It’s easy to be caught in the moment, especially with auctions. Make a budget and stick to it.
  • To make a good budget, make sure you are not using the current interest rate as a bench mark, but the possible higher rate based on the last few years.
  • Include in your budget all property related expenses such as council fees, land taxes, etc.
  • As much as possible, consider all the major events or life plans for the following few years. Such as buying a car, having a baby, overseas travel, etc. Forecast for the worst case scenario, so that you can plan for the best.
  • Use the mortgage calculator on our website to help you. You only need to type in 3 figures and you will have a good understanding of how much principle and interest you are paying for each period during whole term of the mortgage.
  • Still unsure? Talk to an Accountant or Financial Planner to have the best understanding.

 

Find the right bank for your loan

  • Do your research on the loan products on the market
  • When you compare them, make sure you include their admin fees as well as a part of the cost. Some products offer very low interest rates, but once you factor in the annual admin fees, the rate is much higher.
  • Try to use a product that can offer an offset account. At any moment you deposit money to this account it will start saving interest for you, and it will keep saving for you for any period of time it stays there!
  • If you are not certain, be sure to talk to an Accountant or a Financial Planner.

 

Other factors:

  • To make sure that the price is right, invest the time to visit as many home openings as possible and find out how much properties were sold for at the end. Check the history of sales during the past couple of months for similar properties around the same suburb.
  • If price of your dream home is much higher than average, try to bargain down the price. Don’t get too emotional and pay more than what you should. Be reasonable with your offer and remain cool headed.
  • Consider the potential for future capital gain. Even if you are buying the property for yourself to live in, future capital gain should be a part of the consideration too. It means you can earn money by simply living in it. And it is tax free!!
  • Make sure you obtain a professional Engineering and Pest Inspection report before becoming committed to the purchase.

If you are buying an investment property, most the above would apply to you as well but you also want to consider the following issues:

Consider the net impact of cash flow to you.

  • Before purchasing, you need to understand your financial goals. Are you looking at good rental income to have positive cash flow right now? Or good capital gain in the future?
  • To calculate the impact of cash flow, use estimated rental income minus all the expenses. These include interest payments, all expenses to be paid to a rental agent, insurance, council rates, strata, land tax, water, repair & maintenance, and such like. If it is negative, you need to make sure whether your current budget gives you enough space for the outgoings.

 

You can include your end of year tax return as a part of the cash receipts. Remember that you can apply with ATO to reduce the tax deductions from your employer so that you can even out your cash flow over the year instead of receiving the return at the end of the year.

Deciding what properties to buy:

  • House or Apartment: A house with land could mean better future capital gain, however there will be more cash outgoings since they are more expensive. Apartments are cheaper to buy. Therefore provide a better cash flow. However, it may not give you such a big capital return in the future.
  • Location: properties in different locations and cities have different price increase rates or offer different rental incomes. If your main goal in purchasing an investment property is to gain future capital gain. Then focus on the areas that have shown a good performance in price increases. If your main purpose is to generate cash flow, then focus on the areas that will give you better return on rental income. Research into different areas, to see whether there is potential for a better capital gain. Or whether it will give you a good rental return.
  • Environment: Does high or low population density affect prospective tenants?
  • New or Second Hand: New properties are more expensive but are more attractive to tenants, therefore fetch better rents. However there could be hidden problems that can only be revealed once the buildings are a couple of years old.

Declaration: The Excel files and content of this website have been prepared without taking into account your personal financial situation or knowledge of your financial needs. Impact Taxation and Financial Services cannot be liable for any losses or damages arising from using the information provided. It is the user’s responsibility to seek independent advice from a professional accountant before implementing any financial plan.

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Impact Taxation and Financial Services Pty. Ltd. is a CPA Practice based in the Bankstown area. We are committed to customizing our services to meet your financial needs and help you achieve your visions and goals.

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    10 things you should consider before buying a property

    Are you considering buying a property? Do you know you could miss opportunities to save thousands, or tens of thousands of dollars if you don’t plan well before the purchase?

    Below are a few key considerations:

    1. How should you set up your loan structure? If you don’t have a loan offset account for a rental property, after you make extra payments directly to the loan account, you can only claim interest deduction on the remaining balance of the loan. For tax purposes, this deductible balance can’t be changed even if you redraw the overpaid amount later. A good loan structure could also help you to stabilize interest rate and speed up loan repayment by combining a standard variable loan (with an offset account) and a fix rates account.

    2. Timing of renovation. You might want to do a renovation right after you have bought the rental property. But do you know for any genuine repair & maintenance included in the renovation, you can claim an outright deduction against the rental income when the property is available for rental? If the work is done before the date when the property is available for rental, you can only claim the deduction against future capital gain when the property is sold. Depend on when you are going to sell, it could take years or up to decades before you can claim the deduction.

    3. How should you split ownership? You might want to share the property ownership with a family member. For tax purposes, the percentage of ownership is based on the legal title, regardless of who is paying more on the mortgage. If the property will give you a tax profit, you might want to allocate more
    ownership to the low-income earner to utilize the lower marginal tax rate. If it is giving you a tax loss, you might want to allocate more ownership to the high-income earner to utilize the loss. The goal is for the family to pay minimum tax together.

    4. Should you use a family trust to purchase the property? There are many pros and cons related to a family trust. The advantages include tax savings on rental profit or capital gain, asset protection and succession planning on family wealth. However, family trust can’t distribute losses. All losses are trapped in the trust to be used to offset future trust profit. Therefore, you can’t utilize any rental loss in a trust to offset other income such as salary & wages. Family trusts also attract high accounting fees on initial setup and annual fees on financial statements and tax returns. State governments also charge much higher land tax on family trusts.

    5. Will the income level change in future years for different owners? You might want to forecast the possible income for different owners to understand total tax payment / savings related to the property. This could also impact on your decision making on point 3 and 4 above.

    6. Understand when you can treat your property as main residence to receive an exemption on capital gains tax. When eligible, even if you have received rental income, you could still treat your rental property as main residence and receive the exemption. To be eligible, you will need to treat it as your main residence at the beginning. Please check out this ATO link: Treating former home as main residence.

    7. Decide whether you need to purchase a depreciation report. Most taxpayers don’t know that the depreciation on the building will need to be added back to calculate capital gains tax when the property is sold. When the property is held for more than 12 months, after applying the capital gains tax discount of 50%, it will effectively cut the tax rate by half at the time of sales. This makes depreciation deductions desirable for high income earners. However, for low-income earners it might not be ideal to claim depreciation as a rental deduction since they could be paying more on capital gains tax in the future. It could get more complicated if the property is under joint ownership between high and low income earners.

    8. You might want to consider Centrelink payments for future or existing owners. Most Centrelink payments are income and asset tested. Before attaching a rental property to a family member who is receiving, or plan to receive government benefits, you might want to check the testing thresholds first to see if the Centrelink payment will be impacted. This is also applicable when you are making distributions from a family trust to different family members.

    9. Have you considered using your SMSF (selfmanaged super fund) to make the purchase of a rental property? There are a lot of tax saving opportunities with a SMSF since the income tax rate is only 15%. And the capital gains tax rate is effectively only 10% after factoring in the 1/3 discount. The major downside with a SMSF is normally you can’t get the money out until you retire or on compassionate grounds (SMSF does have more flexibilities compared to normal retail super fund. But the choices are still very limited). It could be expensive to set up and operate a SMSF too. There are also strict legal requirements on the trustees. Penalties on incompliance could be severe. Tax law around SMSF is very complicated too. You will need to find a good tax accountant specialized in SMSF to help you to understand the structure, also do a cost-benefit analysis before setting it up.

    10. Consider internal ownership changes. For your existing rental properties, you can also consider whether you should transfer the ownership between family members, or between different business structures (this is not applicable for SMSF). You might want to do this when the income level changes with family members, or rental property changes between tax profit and loss. Before the change, you need to consider the cost of transfer including capital gains tax, stamp duty, conveyancer fees, etc. Again, a cost-benefit analysis is a must before the change.

    Last but not the least, did you combine all the above strategies and compare your choices? If you haven’t yet, how would you know that you have picked the best strategy to minimize your taxes? We can help you to factor in all considerations, compare different scenarios, also present you with a Property Prepurchase Report with all our findings to help you to make a decision. Contact us today to book in a consultation with an experienced tax accountant!

    IMPORTANT INFORMATION
    This is general advice only and does not consider your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from your financial adviser and seek tax advice from your accountant.

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