New things are shiny and exciting and who doesn’t like the idea of paying 0 tax? It is natural for us to be attracted to shiny new things and would want to possess them instantly. However, when it comes to real estate investment, this may not always prove to be a good thing. While buying new property certainly has its own appeal and presents an opportunity for you to get some tax incentives and be less maintenance than established property, being transparent we want to bring you both sides of the story.
In this blog we want to talk about the differences between buying a new vs established property. Also, the whether or not you can pay no tax with new property and whether or not you should invest in new vs established.
Which One Grows More In Value? Property Will Be Forever Supply Vs Demand
There are a few factors that drive up demand for property and these are population growth, location, job opportunities and land scarcity. There are also a few things that drop demand for property which is available stock, also location, affordability and overall appeal.
Whether we are buying new vs established, how much stock is being introduced into the market will also have a big impact on the demand and supply of property. It’s not unreasonable to think while stock is being introduced and built, that supply will be greater than demand. Also, How many areas around the immediate market also have approval for new developments, so how much stock is being built in these areas? So we are starting to understand that stock being introduced into any market is not a good thing to demand.
You also have appreciation vs depreciation. Appreciation comes with scarcity, limited supply and demand. We understand that land is the scarcest thing in the world, and no more land can be made, so the longer an area has been held the scarcer it becomes. We are starting to understand the land grows in value, but is it unreasonable to think the building itself is going to get older over time, it’s going to start to cost money to maintain at some point, and its value is going to drop. Yes, the building is going to depreciate while the land is only going to appreciate.
Example Of Growth On A New Vs Established House Purchased At The Same Time
Let’s say the established house is over 30 years old, vs the new house that is being built. The new properties’ land was purchased for 500,000 and the build cost 500,000 so a mil in value, while the established house and land were also bought for 1 mil. Which one will grow more? The land grows at an average of 7% compound per year. The established property has nearly fully depreciated at this point and the only value on the property is the land. The established house would grow 70,000 in that 1st year, but would a new property be the same?
It’s not unreasonable to think with the shortage of labour and materials that a new build could take up to 2-3 years for the house to be built. So in these 2-3 years, there could be no growth on the new property, because it’s a build. So how would you compare that to the established house? The value of the established home is growing at 7% per year but on the full value of what you purchased which is 7%. Even if the new property did grow in value we understand that the value of land is only 500,000 so you would only get 3.5% growth of the full value of the purchase.
Post-construction Growth: Is It Substantial?
So far the established house is winning in terms of growth. So what happens once the build is done? Do you get your growth then? And how much? This will depend on how much stock is still being introduced into that suburb by the developer, and how much stock is still being built. If the developers are still introducing and selling stock then your not going to see growth for many years until they stop.
There is another factor we are going to bring into this, and that is the depreciation of the new build. According to the ATO, you can often claim 2.5% of a property’s construction cost every year for 40 years from the date it was built. But we all know what it’s like the minute you drive a new car out of the dealership, the value dramatically drops. So you would expect the same for a new build.
Tho for the purpose of using raw research and the ATO figures, for the new house, let’s say your land appreciates at 7% but your build depreciates and 2.5%. So while your land Grew 35k in the 1st year, your build has dropped 12,500 in the 1st year also. As you can see the growth is being hindered by the depreciation of the new build plus when the build actually finishes.
Tax Exemptions: Truth or Just a Sales Trick?
I know what you’re going to say next, what about all the tax exemptions like depreciation and negative gearing you will get on a new property? How many times have you seen these ads telling you that you will pay 0 tax or there are 2 tax secrets if you watch their webinar? I’m going to be blunt, these tax savings are a myth and more of a ploy to get you to buy new property.
You really need to understand the people selling these new properties and the motivations they have behind selling these new properties. You join one of these buying clubs that are cheap and over low memberships that promise you all this access to off-market stock, showing you how much depreciation you’re going to get back at tax time. These aren’t even off-market properties, this is stock they are selling you where they make a commission back from the developer. Also, there produce this stock for their few thousand other members. Further, the reason they charge you so cheap to be in their club or be a member is that they make a huge cut when they sell the property to you. Yes there selling the property to you, not buying it for you. Don’t get confused.
The number of times someone calls me after buying these new properties and tells me how fantastic the depreciation is without completely understanding that depreciation isn’t free money and you have to actually pay it back on the sale of the property if you ever sell. It adds onto your capital gains tax and you end up paying all that tax back even tho at the time you thought it was money in your pocket. Yes, you may be exempt from a 50% reduction of this tax on the profits from selling your property, but this is only if you meet certain criteria. But still, this is what they’re putting in their selling point to you without being completely transparent.
Tax Misconceptions in Property
You need to understand, tax is a pain point for anyone, nobody likes to pay tax, so these sellers get you all excited with the tax benefits without completely explaining to you that there are also a lot of downsides. It’s like negative gearing, people hear the words negative gearing they think it’s free money, the whole reason negative gearing was introduced was to encourage investors to invest in property to create more supply and affordable living in areas that aren’t appealing to investors.
This is a terrible strategy as it takes away cash flow and makes you have to add extra money to the mortgage. You are not saving money by negative gearing. In fact, you lose potential money you could have earned.
It’s funny when you think that on social media it’s all hyped about not paying taxes, but the reality is if you’re using other people’s money, like the banks and their bank loans, these people are still getting taxed.
In regards to paying no tax, when you leverage usable equity to invest in more, you claim the interest on the difference in the loan amount, and this is where they say you pay no tax if your not making any money on the rent. Tho to build that 1st deposit, you would have had to have a wage that was taxed to get that 1st deposit. But if you are not making money on the rent then this means another expense where you have to add more money in to service the loans. Say you make 10,000 a year on rent and yes you have to pay tax on that 10,000. Even at a 50% tax rate. You are still earning more money than if you were claiming a loss on that investment property.
Understanding Equity: Not Ordinary Income
You need to understand, equity is not considered ordinary income, you don’t need to pay tax on it. It’s either the bank’s money or money earned when you sell a property. You only pay tax on the equity if you sell your property. This is what we call capital gains tax. However, when taking out equity through a bank loan, you are leveraging your capital on your property and paying interest on the loan amount. The interest is tax deductible against any profits your property makes.
I hope this clears up a few things about investing in new vs established property and the misconceptions behind paying no tax, negative gearing, and what equity and capital gains tax is.
Taking Your Next Property Investment Step
Choosing between new and old property doesn’t have to be daunting. It boils down to careful assessments of facts, potential returns, and costs. As beginners, it’s essential to bear in mind that property investment is not a get-rich-quick scheme but a steady path to wealth creation that requires patience, knowledge, and wisdom.
For those seeking to grow your wealth through property, Wealth Through Property, a leading property consultancy service in Australia, is ready to guide you on this journey. Whatever property path you desire to follow, remember that the journey to property investing success isn’t a competitive race—it’s a personal marathon. What matters most is making informed decisions that secure your financial future. So whether you opt for the charm of old properties or the allure of the new, each investment can be a stepping stone towards building your property empire, and services like Wealth Through Property can be your navigators on this fulfilling journey.
Ready to start your wealth building journey through property today? Book a free consultation with Wealth Through Property now and let their experts assist you in making the best investment decisions based on your unique needs.
Happy investing!
