Imagine you wish to buy a house and land package as an investment property however need to take out a loan. After thorough research you find the loan product you wish to select. Now it’s time to go through a pre-approval process. This process is when your lender of choice makes a full assessment of your financial situation and the type of investment you are making to approve the maximum amount they are willing to lend to you.
You have just purchased your first house as an investment and have been lumped with stamp duty. There is no fun way to describe this one! Stamp duty is levied tax on all transactions for when you buy a property in Australia. The amount of stamp duty to pay will depend on the location, purchase price and state or territory in which you live. Bear in mind that each state and territory sets its own levels of stamp duty.
Let’s assume you borrow money to buy a house and land package for your rental investment. Negative gearing is the term used for when the amount of money you borrowed for the apartment is more than the amount of rental income you are gaining. The benefit of negative gearing for an investor is their tax bill is reduced due to the expenses on the investment property being higher than the money they are making from it. In the long term, property investors hope to make a capital gain (more on this further down).
Using the above example of a house and land package, positive gearing is when the income you are making by renting out the apartment is more than what you pay on your loan repayments, maintenance and repairs. This means you will have “extra” money but may need to pay additional tax on the net income as a result.
In order to purchase and invest in the house and land you borrowed money. Let’s say the house and land was $400,000 and you borrowed $320,000 to purchase the house and put in $80,000 of your own. Your equity would be $80,000 worth of the house and land package as that is how much you would “own”. The house remains as collateral to your lender until you pay off the remaining $320,000 (plus interest, fees, etc.).
You have come towards the end of your property journey and are ready to sell your house after five years and some items within it. While packing up items in boxes you come across your rare vinyl collection which you want to sell. As the collection was rare over time it increased in value – this is termed appreciation. However, this is not always the case. Let’s say that instead of the rare vinyl collection increasing in value, it decreased in value over time. This is termed depreciation. The term depreciation is two-fold. It can also be used as a valuable tax deduction in a way to reduce your taxable income.
Now on to selling the house. You purchased the house for $400,000 five years ago and wish to sell it. In today’s market you sell the home for $650,000 making a capital gain. It is term capital gain because property is referred to as a capital purchase and it is a gain as you have ‘gained’ more money from buying such a large asset (your house).
The information provided is meant as a guide only. Porter Davis recommends that all clients seek independent legal, tax and financial advice. Full T&Cs here
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