Property is hot right now. Every day there seems to be a news story about the housing boom and how much property prices are increasing. And everyone—from your baby-boomer parents to the local real estate gods—keeps telling you to get into the property market before you miss out.
Unfortunately, too many investors base their choices only on what’s happening now, and ignore what will happen later on.
The average property investor is usually a high-income earner who wants to reduce the amount of tax they have to pay through negative gearing. They look for a property, buy it in their personal name and voila—they pay less tax. Mission accomplished.
But there are a lot more factors to take into account when buying a property, such as asset protection, tax planning and return on investment. But in their haste to lower their tax payable, a lot of investors either ignore these or don’t even think of them.
Which means the investor has failed to consider:
- what the effect will be when the property becomes positively geared
- the Capital Gains Tax that will be payable when the property is eventually sold
- what happens if they’re involved in a civil suit (the property may be included as an asset that can be sold to pay damages).And that’s just a few examples of how focusing only on tax minimisation can result in a poor investment decision.
Now I’m not saying negatively gearing isn’t the right approach. What I am saying is you need to consider your exit strategy before you make your decision. While your solicitor is reviewing the contracts, talk to your accountant and ask for their advice and any helpful instructions.
The key to getting the best return on an investment property is visibility. Just as you wouldn’t start building a house without plans, you shouldn’t start investing without a roadmap.
So if you’re thinking of buying an investment to minimise your tax, don’t forget about the end game. That way you’ll be able to profit from it both now and in the future.