The Land Tax Option for First Home Buyers Ends on 1 July

From 1 July there will be a few changes to stamp duty and land tax for First Home Buyers. This will advantage those first home buyers wanting to purchase a property under 800K, but disadvantage those who buy in the range of 801K to $1.5milion as the Land Tax option explained below will be unavailable as at 1 July.

Stamp Duty Exemptions

In NSW, a first home buyer is exempt from the payment of Stamp Duty, if the property purchase is under 650K. This will change on 1 July to 800K, so if you are currently looking to purchase your first home in the 650K-800K price range, it may be to your benefit to wait until 1 July if you already have a preapproval that expires after that date, or wanting to prepare for a preapproval ready to purchase.

Land Tax vs Stamp Duty

For most first home buyers, the stamp duty exemption is capped at a figure that is unrealistic for buying a property in Sydney. However there is currently an option where first home buyers can instead choose to pay an annual land tax instead of a large stamp duty payment up front. This is most advantageous for those first home buyers wanting to purchase an apartment, which has low land value vs the total value of the property. The price cap to purchase a property and have the choice to pay land tax is $1.5mil.

If you were to take the land tax option, you would pay an annual land tax fee for the time that you own the apartment. If the intention was to hold onto it for 4 years to get into the property market, and then sell it later and use the equity to buy a larger home or a property in a different area, the total land tax you would pay would be much less than the stamp duty that would’ve been payable.

I provide a few examples:

Purchasing an apartment in Mosman

If you were to purchase a 2 bedroom apartment in Mosman with a purchase price of $1.4mil. Depending on the size of the apartment complex – the higher the number of units in the complex, the lower the land content/value, your land value may be around the 315K mark. Your land tax liability is based on the land value, not the total property value, so the annual land tax payable would be $1,346. If you were to hold onto the property for 4 years, your total land tax payable would be $5,203. This is instead of paying the upfront cost of $61,200 stamp duty.

If you had the stamp duty figure saved, but took the land tax option instead, you could pay a larger deposit for the purchase and result in lower monthly repayments. The only other cost would be the lenders mortgage insurance – as that exemption cuts out at 900K and you would likely earn more than the eligibility criteria. So in total you’d need approximately 8% of the purchase price to purchase the 1.4mil property instead of a 12-13% deposit.

Purchasing an apartment in Carlingford (Parramatta region)

A 3 bedroom apartment in Carlingford recently sold for 900K. The land value of the apartment was 174K, so the annual land tax liability would be $922, or $3564 over a 4 year period. This is in comparison to the stamp duty liability of $35,590.

There would also be a lenders mortgage insurance exemption if you qualify for the First Home Guarantee Scheme, so the first home buyer would only be required to obtain a total of 5% of the purchase price as savings.

Purchasing a house in St Clair (outer Western Sydney)

Looking at a 4 bedroom house that recently sold for 850K, the land value would be 439K, so the annual land tax liability would be $1,717, or $6,637 over the 4 years, vs the stamp duty figure of $33,340. Being a house, the land content is higher than for an apartment, but if the time that you intend to hold the property is less than 10 years, you would still be much better off. Having the land tax option also means that you do not have to save the 33K required for the stamp duty.

As a first home buyer there would also be the opportunity to take up the lenders mortgage insurance exemption if you qualify, so you would only require 43K plus legal/moving/set up fees to purchase the property.

Downside to land tax

The downside to paying land tax, from an immediate buying perspective, is that the estimated land tax liability is added to your living expenses in the bank calculators, when determining how much you can borrow. So taking up this option will reduce your borrowing power, particularly for those who purchase a property with a higher land content – as shown in the St Clair example.

The other downside is that the annual tax is indexed, so your liability may change over time.

Deadline of 1 July

If you are looking to purchase your first home in the price range of 801K-$1.5mil and want to take up the Land Tax option, you have until 30 June to purchase a property. After this date, you will be required to pay the stamp duty upfront.

So if you are keen to purchase a property prior to 1 July to take advantage of saving up front costs to purchase your first home, please give me a call on 0414670151 or email jennifer@jblhomeloans.com.au