A national land tax is comming!

[Neophyte]

So I guess landowners that are close to pockets of developed land will be "encouraged" to sell to developers and the like for new housing?
Would then in tern mean more new housing or would the land owners get round the huge potential tax bill some other way?

Yes part of the idea behind it is to not let valuable land sit idle.

This also means holding onto 1 acre blocks in mid-suburbia is going to have a significant cost.

All of this really depends on what the land tax rate is. Council rates are basically a land tax in most places. Its just that the rate is nice and low.

 

[ponny]

The rent achievable is always a product of supply and demand, often with little relation to the increase or decrease in holding costs.

Daniel is quite correct to consider ALL factors in his decision to buy more IPs. He already has 2 so is not the complete amateur or scare-monger some posts here seem to suggest.

Rents do NOT go up necessarily just because expenses to the LL increase. The same way as there was no overall reductions in rent when interest rates plummeted to the lowest level in memory.

If rents go too high then people simply don't rent at that price. They move in with friends, back home, couch surf, find something they can afford. Then the higher priced rentals stay empty until the rent is reduced to a reasonable level.

We have owned IPs in the 1990s when rents stagnated for several years. To actually get a tenant there were various inducements - some I remember were one or two weeks rent-free, $500 towards moving expenses, free electricity for the first xxx months etc. As IPs became less attractive to investors property prices stagnated and even dropped, which meant more renters took the opportunity to purchase a PPOR.

Immigration is not new. Our population has been steadily increasing over the last 50-60 years, so the number of households has been increasing.

Among our immediate circle of friends there are 4 households that have chosen not to enter the rental market. In one case there are two adult kids(and their partners) who have moved back with mum and dad while they are taking 6 months to each build new homes. Another friend has her daughter and family doing the same thing. And in a fourth case the parents have moved to their holiday house and the son and his partner are living in the previous family home.

So do not automatically assume that an increase in costs can be immediately passed on. Maybe it can and maybe it can't.
Marg

Totally agree. Plus I think immigration law changes will play a major role in the rental market in the next few years too.

 

[GreatPig]

If it replaces stamp duty

I thought one of the aims of stamp duty was to try and prevent trading and short-term speculating in real estate due to the high transaction cost, something the land tax won't do.

So the change would favour those into buy-reno-sell. Much lower transaction costs, and short enough hold time that the land tax wouldn't make much of a dent.

GP

 

[Graemsay]

DanielG, I'd be interested to see more of your reasoning as to why you think that buying an IP isn't a good idea if there's an impending land tax.

The aim of the Henry Report is to simplify taxes whilst keeping overall revenue broadly the same. My guess is that any land tax would be under 1% of the property's value per year, rather than the scary Texan levels that you allude to.

There's been some speculation that negative gearing might be removed, and that would potentially bring in far bigger costs for some PIs. (Although I'm yet to be convinced that a highly negatively geared IP is anything other than a gamble that property prices will continue to rise in excess the rate of inflation.)

I do agree with Marg4000 on tenants. Whereas a buyer might be willing to stretch to get somewhere nice, I think that a renter is more likely to compromise to suit a budget.

GreatPig, interesting point. I'd say that encouraging renovation is a good thing, as it improves the general housing stock.

 

[BV]

So the change would favour those into buy-reno-sell. Much lower transaction costs, and short enough hold time that the land tax wouldn't make much of a dent.
GP

bring it on

 

[DanielG]

DanielG, I'd be interested to see more of your reasoning as to why you think that buying an IP isn't a good idea if there's an impending land tax.

Hi Graemsay, Thank you for the question. I guess I have seen in my rather short time how Government "ciphers" wealth off people by imposing taxes. First its at the "transaction" level, and when they are not happy with this, they put in place "time trigger" taxes to get at you again. See with stamp duty, at least you know upfront what is the cost, you wear it and its gone, never to touch you again (unless you do a transfer or name or something that triggers it again). However, with a "rolling" land tax, you must worry about it every year, which means you can buy a property under certain assumptions but then they have you, that is to say, your only choice once you have bought the property is to sell if you don't like the increases the government impose, but if you do, you get hit with a 50% CG tax.

My preference is to know the tax "upfront" and deal with it then to be caught after the purchase.

 

[Hooray]

but if you do, you get hit with a 50% CG tax.

Wrong. The absolute maximum CG you're ever going to pay is 22.5% if held for >12 months. And that's assuming you make more than 180k on everything else. Do you make that much?

My preference is to know the tax "upfront" and deal with it then to be caught after the purchase.

Since you don't write the tax laws, your 'preference' doesn't matter and you don't have a choice. Well, you do. Just don't buy property.

 

[DanielG]

Okay, because everyone here seemed to deem this tax as inconsequential, I just phoned my uncle in Chicago Illinois, USA. He has a townhouse which he OWNS worth approx. $400,000, do you guys want to know what his current land tax bill every year is????? $14,000!!!! Yes, you heard right, $14,000. I was stunned by this myself, I never actually asked how much he was paying.

Imagine everyone here with a property worth $400,000 (which will be most), will have to pay a $14,000 a year tax bill, how does your investments look like now? Is property such a wealth creator under this scenario? What if you own 5 or 6 properties across Australia, can your IP cashflow support this?

Okay im not saying this is whats comming, but its very much a possibility under such a scheme.

 

[JIT]

Okay, because everyone here seemed to deem this tax as inconsequential, I just phoned my uncle in Chicago Illinois, USA. He has a townhouse which he OWNS worth approx. $400,000, do you guys want to know what his current land tax bill every year is????? $14,000!!!! Yes, you heard right, $14,000. I was stunned by this myself, I never actually asked how much he was paying.

Imagine everyone here with a property worth $350,000 (which will be most), will have to pay a $14,000 a year tax bill, how does your investments look like now? Is property such a wealth creator under this scenario? What if you own 5 or 6 properties across Australia, can your IP cashflow support this?

Okay im not saying this is whats comming, but its very much a possibility under such a scheme.

Perhaps it's possible... but is it probable?

How likely is this to happen in reality?

ie. land tax alone on a 350k property is as much or more than the rental income?

You're sounding hysterical.

Do you want to base your financial future on the likelihood of this becoming a reality??

 

[skater]

Okay im not saying this is whats comming, but its very much a possibility under such a scheme.

Oh, no, the sky is falling.........

Tell you what. I'll put you out of your misery. You are obviously worried about the possibility of the same thing happening here. How about I buy all your property from you, at half it's worth, to make up for my risk, of course.

This would be a win/win. You don't have to pay all that nasty tax and I benefit from the time being. How about it?

 

[vincenzo]

...I just phoned my uncle in Chicago Illinois, USA. He has a townhouse which he OWNS worth approx. $400,000, do you guys want to know what his current land tax bill every year is????? $14,000!!!! Yes, you heard right, $14,000. I was stunned by this myself, I never actually asked how much he was paying...

Was your uncle behind in tax and rate payments by more than a few years That can't be the standard yearly tax on a townhouse worth $400k!

 

[RumpledElf]

Was your uncle behind in tax and rate payments by more than a few years That can't be the standard yearly tax on a townhouse worth $400k!

Nah, they are pretty high over there.

Mind you $400k is a very expensive house there, and a pretty average one here.

 

[weg]

Okay, because everyone here seemed to deem this tax as inconsequential, I just phoned my uncle in Chicago Illinois, USA. He has a townhouse which he OWNS worth approx. $400,000, do you guys want to know what his current land tax bill every year is????? $14,000!!!! Yes, you heard right, $14,000. I was stunned by this myself, I never actually asked how much he was paying.

Imagine everyone here with a property worth $400,000 (which will be most), will have to pay a $14,000 a year tax bill, how does your investments look like now? Is property such a wealth creator under this scenario? What if you own 5 or 6 properties across Australia, can your IP cashflow support this?

Okay im not saying this is whats comming, but its very much a possibility under such a scheme.

My understanding is property tax in the US is much like our council rates.

Now I'm not sure on this one but I think you can claim the interest from your PPOR as well. (where's ozperp ).

My point is that you really can't compare two very different systems.

Here's a link btw showing what they do pay.

http://www.taxfoundation.org/publications/show/1913.html

 

[Graemsay]

DanielG's figures from Chicago work out at 3.5% of the property's price per annum. According to a stamp duty calculator, that's broadly similar to what's due on a $400,000 house purchase in NSW.

I've got a feeling that in the UK people move house (on average) once every seven years. In that case, a 0.5% rate of property tax would be roughly revenue neutral.

However the Henry Report talks about simplifying the tax system by combining taxes. So it's possible that council rates will be included. A quick Google found this page, and it looks like they work out at around 0.25% of a property's price.

Adding these together comes to 0.75%, so that's the sort of level I'd expect it to be levied at.

That said, I can see where DanielG's concern is coming from.

There are two other things to bear in mind:

1. Would the tax be levied on all properties, or just those that are purchased after a different date?
2. Would the level be based on the purchase price of a property, or its current value?

If the tax isn't going to be levied on houses that have had stamp duty paid on them then it would make sense to buy now to escape it. Over the long term (i.e. on a buy and hold strategy) the annual cost could exceed the initial stamp duty that was avoided.

If the tax is going to be levied on all properties then any purchases within a couple of years of it being introduced will effectively be double taxed. (i.e. The buyer will pay both stamp duty and the land tax.)

The second point is from something that my brother mentioned whilst I was in the States over the summer. The land tax there (well, in California at least) is based on the purchase price. So over time inflation erodes the payments, meaning someone who purchased a house cheaply in the 60s or 70s might be paying a fraction of what their neighbour who bought recently is.

I'm not sure how equitable that is, as it could be seen as a subsidy of older taxpayers (who tend to be asset rich) by the young (who have relatively little wealth). But it does circumvent the argument that the tax will hit older homeowners relatively hard.

 

[keithj]

The Australian claims to have a copy of the Henry report.

A briefing note Dr Henry distributed in the final stages of the report, which The Weekend Australian has obtained.....

The review panel has not fallen for the obvious traps of taxing the family home, or extending the land tax base to households in exchange for the abolition of stamp duty on home sales.

Looks like the demise of property investing as we know it has been postponed yet again.....

 

[jingo]

The Australian claims to have a copy of the Henry report.



Looks like the demise of property investing as we know it has been postponed yet again.....

Yes, I read that this morning and thought exactly the same thing!

Regards Jason.

 

[Graemsay]

Henry has made it clear that his eponymous review is about simplifying the system, and that it'll be broadly revenue neutral in terms of raising taxes, so I wasn't really expecting any major changes.

I'm curious to see why a land tax was ruled out (assuming the Australian's article is correct). Although it's possible that it's something that's going to get kicked past the next election.

What struck me was the comment about tightening up the loopholes, deductions and benefits that the rich use to reduce their tax bill.

There are a few possibilities there: Unifying income and capital gains tax (though Henry has ruled that out in an interesting speech); or eliminating negative gearing, but that wasn't popular last time they tried it. These could have a far bigger impact on the property business.

 

[Graemsay]

There's more analysis and reading of the runes here.

What caught my eye was this section, particularly the emphasised part.

Henry calculates that, at present, for a middle-income earner on a nominal marginal tax rate of 31.5 per cent, the real effective marginal rate of tax is minus 40 per cent for saving through superannuation, zero for saving through paying off owner-occupied housing and plus 54 per cent for saving through bank accounts.

The tax rate on saving through ownership of rental property is plus 24 per cent if the property is owned outright, but minus 22 per cent if negatively geared. The tax rate on saving through listed Australian shares is plus 10 per cent if the shares are owned outright, but minus 35 per cent if negatively geared.

Given that there's been a certain amount of discussion about equalising the amount of tax paid per dollar earned, I wouldn't be surprised if there'll be big changes here.

 

[Perp]

Although we don't have the details yet, the one thing I can guarantee is that property investors will be paying a lot more than before. This is the same tax as in America which makes real estate investing over there too expensive.

1) Many of us are already paying land tax. This will only be a negative if it's at a higher rate than we're already paying. Since only a small proportion of properties currently attract land tax, it seems likely that if more properties have to pay it, the % will drop. So sounds great to me!

2) Who says real estate investing in the USA is "too expensive"? Their yields are way higher than ours, and CF+ is the norm (in many, but not all, areas) even at 100% gearing.

I'm not sure I understand how less investors in the market = higher rent. ... 10 people, 10 houses
3 people have mortgages, 3 people free hold, 4 are tenanted (owned by investors)
Taxes go up, the 3 with mortgages sell up, so now 7 tenanted, 3 freehold owners, still 10 houses

I agree that this point is often overstated, and thrown out without much thought behind it, but I do believe that the inefficiencies resulting from structural changes (ie lots of moving) could cause rents to rise.

Let's say that only 1 of the 3 mortgaged households is put up for sale, and 1 of the 4 tenanted IPs (owned by a "spooked investor".) Of the 3 remaining investors, 2 don't wish to add to their portfolio in the current environment, and the remaining investor can only afford to buy one more IP. So there are 2 properties for sale and only 1 purchaser. The purchaser is aware of their bargaining power and manage to negotiate a low price, and thus even at a stable rental level, the yield will increase (admittedly probably only by a maximum of 10%-ish).

But of more significance is the fact that the family who are selling their PPOR are probably already looking for a rental property, so that they're not caught short when their home sells. And the tenant of the IP that's been put on the market is also looking for a new rental, because they're concerned about security of tenure. So we have two properties "becoming vacant", and two households looking for a rental, but neither of the properties becoming vacant are in the pool of prospective rental properties because they're for sale.

So in fact the two houses for sale end up being "out of the equation", and the two households are seeking a non-existent rental property. (Non-existent because the 8 remaining houses are already all occupied.)

When the investor manages to buy one of those two houses, the two households are now competing to rent this one property, and thus the investor who's picked it up at a strong price, can also demand a higher rent.

You end up with 1 vacant property still for sale, and 9 households wanting to live in 8 houses.

 

[DanielG]

Hey all I just got back from holidays and I was greeted with such warm replies. Obviously Ive pissed too many people off here and that was not my intention, I wanted to have a rational debate about government distortions in the market but got smacked all over the place. Everyone here is bullish on property, and that's fine. I will CONTINUE to buy into RE and I will refrain from posting any more such postings as I see I attract the ire of the community here.

I hope I am wrong about all this, I just see whats happening in the UK and US and I think there is strong pressure for our government to follow suite, in which case housing would not be the wealth creation vehicle I hoped and when I am about to retire in 20-30 years I will end up in debt.

Thanks all for your replies, I wont continue to add anything further to this post.