Smart strategies to deal with stamp duty
February 26, 2015 / Written by Rich Harvey
When you're buying Australian property, the hidden costs can be a real stick in the mud - especially stamp duty. Now don't get me wrong, there are huge benefits to buying a property in the current climate, but constraints like this can make it unnecessarily difficult for buyers, especially those purchasing for the first time.
But as this tax comes through as a percentage of a property's total value, the ever-rising Sydney market is facing higher and higher taxes. Malcolm Gunning, president of the Real Estate Institute of New South Wales (REINSW) recognised this and said as much in a February 5 statement.
"Bracket creep is a major issue in NSW. Due to increases in property prices, home ownership is being taxed at levels higher than they were ever intended," he said.
"Stamp duty was never designed to slug the average property owner at such high levels. It is time for the nonsense to stop".
But how can buyers navigate the market or avoid being hit so hard by this tax?
Getting the grants
According to that REINSW release, the average amount of stamp duty faced by house hunters was $33,490 in December 2014. That's just over $3,000 more than the same time in 2013. Luckily, there is relief available.
If you're a first time buyer and are going to live in the house for six months or more, you can apply for a First Home Owner Grant worth up to $15,000 until January 1 next year. This won't cover all the stamp duty depending on where you buy, but can definitely ease the sting.
Find some greener pastures
With stamp duty calculated on the value of a property, it may just be worth your time to seek property elsewhere - with the help of a buyers agent, of course. For example, we recently helped people buy units in Brisbane before they came to market, using our in-depth knowledge of the market and long list of contacts.
These properties have increased in value before the construction was even completed, and they came in at a much cheaper price than the current Sydney median. Note also that each state has different rates of stamp duty: Slightly lower in Queensland, and significantly higher in Victoria.
Buy land and build
The other smart strategy for minimising stamp duty is to find a well-positioned block of land and build your investment property. For example, on a $600,000 property in NSW you will pay $20,025 in stamp duty. However, if you were to purchase land for say $240,000 you are only liable for stamp duty of $6890. The downside of building is that you don't receive any rental income during the construction period – but the upside is you get a brand new property with lower maintenance costs and higher depreciation allowances.
The NSW Government is also offering a New Home Grant which provides a $5000 rebate off stamp duty to encourage the development of new homes. So this reduces the liability even further to just $1910. We have recently helped several clients use this strategy to purchase land where they can build a duplex (4 bed + 2 bed) for package price around $620,000. This will generate a conservative rental return of $820 per week, so a rental yield of approximately 6.9 per cent. This opportunity provides a positive cashflow investment property which is ideal for growing your portfolio.
Just because the market can be difficult, does not mean it is impossible. With the help of grants, expert buyers' agent knowledge and a well thought out plan, it can be possible to find a fantastic new Australian property investment, or even a new family home.