Question Mark

OFF-THE-PLAN
Q: A couple of years ago I bought a property “off-the-plan”. The property has just settled, and I was surprised to find that stamp duty was added on to the purchase price. I hadn’t budgeted for this. I thought the point of buying off-the-plan is to avoid paying stamp duty?

Buying a property off-the-plan reduces your stamp duty liability, but it doesn’t eliminate it altogether.

Stamp duty is calculated on the value of the property at the time you sign the Contract of Sale, not the value of the property when it settles.

When you bought the property, construction hadn’t begun, but you were still liable for stamp duty on the value of the land that was notionally apportioned to it. Your financier should have informed you about stamp duty and associated purchasing costs before you signed the contract.

I can understand your disappointment. However, take heart. Stamp duty liability increases as construction becomes more advanced. This means that from a pure tax perspective, you’re better off than someone who buys a partly completed property, and is liable for more stamp duty.

SELL OR RENT?

Q: I have put my Adelaide home up for sale, but the market seems very slow at the moment, particularly in this suburb. If I don’t get an offer, would it be wiser to keep paying the mortgage out and rent my house for a few years? I could use the rental income to pay the mortgage on the property, which will be positively geared.

You haven’t mentioned whether or not you are planning to return to the property at some stage. If you have an emotional attachment to the property or the location and you’re planning to come back and live there in the next few years, you would be better off holding on to the property and renting it out.

If you are not planning to return, you must think of your property purely in terms of investment potential, rather than as your former home. You should determine its long-term capital growth prospects. How much did you pay for the property when you bought it, and what price are you hoping to achieve when you sell? While no one has a crystal ball, the property’s past performance should give a reasonable indication of future growth prospects.

If you believe the growth prospects are strong, holding the property as an investment may work for you. If you believe growth will be limited, you may be better off selling it and using the proceeds to purchase an asset with better investment potential.

HOLIDAY HOUSE

Q: My partner and I work long hours and we need an escape valve. I’m thinking of buying a holiday house and renting it out for half the year to help pay the mortgage. What are your thoughts on this strategy?

This is a common strategy '” but it’s also a very risky one. Whether your property is by the beach or in the mountains, the climate is a key attraction of holidaymaking areas.

Most holidaymakers will want to live in your property at the same times you do '” peak periods like Christmas, Easter and school holidays. Rental income is much higher during peak periods. To maximise your rental income, you’ll be forced to miss out while your tenants enjoy the best weather of the year.

More significantly, many landlords of holiday homes borrow heavily to buy their asset. They justify this to themselves by thinking they’re buying a “sound investment”, since the area is popular with tourists.

However, when the economy weakens (as it eventually will) and money gets tight, tourism starts to slow down. Property owners pull their belts in, and the holiday home is usually first on the chopping block.

If your cash flow gets tight and you’re forced to sell your holiday home, you may be competing with many other vendors who are in a similar position. This will make it much harder to sell your property, and you could be forced to take a loss, or worse still, not be able to sell at all.

A better alternative is to buy the property and rent it out all year round to a permanent tenant. This way you buy yourself some time to pay down the loan and, eventually, get into a position where you don’t have to rely on rental income to service the debt.

IN WHOSE NAME?

Q: I earn $80,000 a year and my partner doesn’t work. We want to buy an investment property. I was going to buy the house in my name but someone told me it should be in my partner’s name to minimise tax. Is that right?

I’m afraid your friend is wrong. To minimise tax liability, the property should be purchased in the name of the highest earning (and highest tax-paying) partner '” in this case, you.

Negative gearing works by offsetting the costs of holding the property against the tax you pay. If your partner is not earning an income, there is no tax benefit in buying the property in their name, because there is no income tax to offset the holding costs.

One of the ironies of investment is that the strategy that works for you when you’re buying can work against you when it comes time to sell. If you buy the property in the name of the highest income earner, you’ll also pay a higher amount of capital gains tax when you sell (assuming, of course, that there’s gain to tax).

Ownership strategy is a very complex area of property investment, so you should consult your accountant before buying.