Thinking of buying property just to save on taxes? Think again. In this article, we explore why the strategy of purchasing negatively geared, new properties for tax benefits is often misguided. Learn how it can impact your portfolio's growth and what alternative approaches can help you achieve long-term financial success.
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Can you actually buy property, save on taxes, and still grow a property portfolio?
In this article, I want to cover exactly:
It's very different from just trying to save on taxes, so if you're interested in my thoughts, then definitely keep reading.
Picture this: you go to your accountant, they do your tax return, and it comes back, and you're like: I didn’t get a refund. I have to pay more taxes. The first thing you ask your accountant is, “How do I reduce my taxes?”
In response, they often suggest: Well, you should buy property. Not just any property, but you need to buy something new and ideally negatively geared.
In an environment like now, where interest rates are so high compared to the last couple of years, you’ll find that most things are negative cash flow. So, the negative gearing part is there, but you need something new because:
However, at a high level, the TL;DR is that when you buy something new, you're often in an area that may not have the ideal metrics for short-term or long-term capital growth. You just get sold on the idea that it’s new; everyone wants to live here; it’s the new growth corridor. Also, why would you want to buy something old when you can buy something new? There's less maintenance, right?
I would argue that most of the stuff built today versus 20 years ago is complete b*lls*t.
Apart from that, you’ve got to be careful about who refers you to these new house and land packages. The fact is, if it’s your broker or your accountant—or it could be both—then you’re definitely in trouble, because they will get a massive kickback. That’s how they make so much more money than just doing loans or accounting for you and your tax returns.
I’m not saying everyone does it, but if you’re getting referred and there are no costs upfront, then you should definitely be wary.
Another thing I urge you to think about is:
Yes, you're asking the right questions, but to the wrong people.
That’s why, if you’re talking to a buyer’s advocate or a buyer’s agent, they should be solely focused on helping you buy the right property.
When it comes to property strategy, not every buyer’s agent is the same either. I know this because so many of you have started a career in the BA space after watching my YouTube videos and reading my blogs, which is super awesome because I think more people actually need help.
However, the problem is that a lot of people are coming into the industry without experience, so they may have no idea how to:
Therefore:
Now, before I get off-topic, let’s come back to this whole idea of taxes.
When you say:
What you’re doing is operating with a mindset of limitation.
You want to operate with a mindset of abundance. You’ve heard it before: think with an abundance mindset.
If you’re like me, your TikTok is flooded with all this motivational, inspirational stuff from people who’ve gone out there and killed it, and they always tell you:
There’s more money out there, and you can just make more rather than just saving what you have.
I’m not saying that saving and saving on your taxes is a bad thing. I’m just saying that you can’t do both, and you need to make a very clear distinction between what you’re actually doing here. Is it that you just want to save more money and save on your taxes?
Well, great, you’ll live a small portion of life, and that’s completely okay. But I think the problem is that most people think they want one thing, but in reality, they want to go out there and live a life of financial freedom.
I hear the same exact words every day:
“I want to retire early, Ravi.”
“I want to have a portfolio that can one day pay for my expenses.”
Why?
Well, apparently, the universe sends more energy toward you to achieve those goals by thinking this way. Therefore, I urge you to think about:
Is it to save taxes and live in this base?
If you're trying to achieve that 1% life, then you're going to need to do things differently.
How many people do you think go to their accountant every year and say, “I want to save taxes”?
Although it’s a great bonus to save on taxes, I don’t think I’ve ever asked my accountant, “How do I save on taxes?”
In the last 5 years, I’ve said, “How do we structure things better so I can keep moving forward?”
This is the discussion I have, and he always comes back to me at some point and says, “Ravi, your tax bill is going to be great this year. It’s going to be huge.”
In response, I was like, “Great! If I’m paying taxes, that means I’m making money, and that is a good thing because I can keep using that money to leverage my position—whether it’s in my business to keep growing, acquiring more businesses, investing in other things, or investing in property.”
This is the mindset I operate with, and I think it’s how you’re going to align better with the results you actually want.
Now, let’s figure out what this depreciation is and how much of a benefit it can actually make.
Say, for example:
How depreciation works is on paper. This accounting figure of $400,000 gets depreciated over 40 years, so it’s essentially saying, “Oh well, the house itself is depreciating. So, Mr. ATO, what you need to take into account is that although I may be making money in my everyday work, I’ve actually got an asset that’s depreciating (poor me).”
In reality, we know that land appreciates, and buildings depreciate, but we also know that house prices go up. So, you’re effectively using a loophole, but it’s completely legal.
What would happen is they would say: Okay, you have a property for $400,000, which is the build price, and I’m not going to consider the land component. I’m going to say for this purpose that your building will depreciate to $0 in 40 years. That means we’ll simply divide $400,000 by 40 years, which is $10,000.
Therefore, on paper, you’re going to have a loss, which is depreciation of $10,000 to knock off what your income looks like. So, if you made $10,000 that year, and your building depreciated by $10,000, it will effectively mean you pay zero, because your income is zero.
So far, this sounds amazing, but when you actually think about this in reality and in practice, you might rethink it. What happens is that the $10,000 has to go against your tax rate, and in most cases, it’s maybe 30%, so realistically, you’re only getting the benefit of $3,300.
Although saving that kind of money could help toward maybe a small holiday every year, I want you to think bigger. My motto this year, for myself and my business, is to think big.
It’s not just thinking big, but also going bigger than that.
Now, let’s look at some examples as to why I would offer a different method.
Most times when you’re purchasing a property like this, it’s probably not located in an area where the numbers completely make sense.
This is for long-term growth—not just with capital growth, but also with rental growth.
Is there going to be demand in the short term and the long term?
There are areas of Sydney that I 100% know I was telling people to avoid even 4 years ago, which was when we had such a massive boom in property prices. But people still opted to go there because it was the next big thing.
It was like, “Hey, this is going to be a million-dollar suburb,” and over time, it’s become a million-dollar suburb. But the rate at which it grew and the amount it took to just hold that property, even when interest rates were low, was significant on most people’s budgets. Instead, if we had gone out and just purchased well across Australia, you would have had a better cash flow position and made significantly more money.
This is why I’m so confident in this strategy, because I’ve been doing it for 11 years myself, personally. So, I would much rather go and invest in an area where the numbers make sense, and I can get above-average growth, versus going into an area where, sure, I can save some tax, but when I look at my net position at the end of the year (and you should be operating this like a business), I would say:
“Well sure, I got to save a little bit here and make a little bit less here, but I’m actually in a worse position than if I had gone down the other strategy.”
To showcase what that looks like, I’m going to show you the same property with three scenarios.
Say, for example:
Yes, it still looks pretty good, but if you account for things like inflation, it hasn’t actually been that great.
Now, why would I show you 3% when the average is 7%?
Well, you've taken a haircut because you probably bought a house and land package where there are so many marketing costs, bloating up that price, and people get their referral fees, which means you're not actually buying something that's technically worth $650,000. It’s probably worth a lot less.
Additionally, you’re also buying into an area where there’s probably a whole land release with other demand, but the supply is going to outweigh the demand in that short period of time.
Now, you’re in a position where you’ve made some money, and you’re hoping for 3% growth, although in some areas, it’s probably gone backwards.
However, what does it look like if you just said: Okay, I don’t care about the taxes. Let me go and just find a property that is average.
You then go out there and buy something average in a different location that might be a little older.
Now, that $650,000 property is worth $911,658, which is more than $150,000 in terms of capital growth.
Keep in mind, this is tax-free. Equity on your property is tax-free.
Now, when you sell, yes, you’re going to have to pay capital gains tax, but it’s one of the lowest taxes you’ll ever have to pay.
Therefore, in this case, you’re actually significantly better off because if you’re just saving $3,000 on your tax refund, you’re letting go of the potential to make an extra $150,000.
Now, I’m going to take this a step further because I can, and in this example, I want to show you what the average is for a Search Property client.
To be honest, the average for Search Property clients, including myself, is 11%. This means that the property for $650,000 after 5 years would be worth closer to $1.1 million, which would mean $445,000 in tax-free equity. This is the capital growth you’ve experienced.
Now, if you look at the difference between what we do versus what the average market would look like, it’s a difference of almost $200,000 in just 5 years. Imagine what that looks like when you extrapolate that out for 30 years.
If you compare this to just going with one of these providers that told you, “Hey, I should buy something new because I get to save on some tax,” well then, you’re looking at a difference between $100,000 and $445,000, which means a difference of $350,000 or thereabouts in 5 years.
Again, we only know what we know, so if you’re not having these conversations and you’re unaware of these things, unfortunately, a lot of people make the mistake and then ultimately try to fix it. By that point, it’s probably too late, or you’ve experienced a lot of damage to your portfolio.
Now, the next part you need to consider is:
The reality is that so many people, when they’re buying, are trying to buy new with negative cash flow.
You might be cash flow negative right now, but if you’re negative cash flow by between $5,000 and $10,000, that seems pretty normal.
However, some people are actively going out there, buying property that is negative cash flow on purpose by $30,000 to $40,000. Why? They get to save some taxes and hope that the property grows in value. They’ve also been told it’s blue chip, so it’s going to go up. But the reality is, what is blue chip? What you want to look at are:
You can’t just say, “Oh well, this is a blue chip area. I’m going to trust whatever happens,” because past performance is not indicative of what happens in the future.
This is what we’ve experienced in many areas where people said, “Don’t buy here because it’s a sh*t area.”
However, they haven’t considered that there’s so much change coming to the area, which is why that area has experienced so much growth and will continue to outperform other areas.
There are two things you need to keep in mind when considering negative cash flow:
If you have to suddenly put $500 extra towards your property, it doesn’t feel so great. You’re going to have to think about it, and you will stress about it. Equally, if your tenant leaves, you’re probably down in the pocket by $1,000 a week, and now you’re forced to sell at the worst time because that’s how the markets work.
On the flip side, if you have a negative cash flow property today, which is slightly negative, when you forecast your rental growth over the next 2 to 3 years, you’re probably in neutral, if not positive cash flow territory without even interest rates changing.
If we have interest rates change, you’ll probably get there a lot quicker. This is important because you can then hold more properties.
You can buy one property and say, “Well, I get the tax benefits,” but if that stops you from buying your second property, a property worth, say, $450,000, at 10% growth, that’s $45,000.
Even if you had to wait 3 years to experience that $45,000 worth of gains, it would still outperform the benefits you’d get from just having a negative cash flow property, just trying to reduce your taxes because, again:
If you want average results, then go ahead and do what average people do.
However, if you want that big portfolio and you want to achieve the 1% lifestyle, then you have to do things differently and align yourself with the right people to be able to execute on that.
I need you to start taking these actions, and if you want help, book a free discovery call with my Search Property team.
I hope you’ve learned a lot from me in this article.
I’ll catch you guys in the next one.
Thanks, guys!
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