One of the considerations for choosing a particular type of property may be the timing of available tax deductions.
One of the advantages of buying a house and land package is that the contract is in two parts and stamp duty is therefore only levied on the land component.
Once the land is registered, it is settled and ownership is transferred to the investor. The building plans need to be stamped in the new owner’s name, a process that may take up to 6 weeks or longer, depending on the particular council process.
The house is then built in stages normally over a period of about 6-9 months. When you allow for council permits to be issued, the build process and then occupation certificates to be issued at the end of construction, a house and and package can take up to 12 months to complete.
The typical stages for a house construction and percentage progress payments are:
From one month after the land settles, the lender will require interest to be paid on the portion of the loan that has been drawn down to date. As the build progresses through the stages and the lender funds more progress payments, the outstanding balance grows and so do the repayments.
Servicing the debt while a house and land package is built is like making ‘mini mortgage’ payments that become progressively larger until the first full mortgage payment is due one month after the final progress payment has been made.
Assume a house and land purchase made in Qld, for $430,000:
1.Land component $200,000
2. Stamp Duty on the land = $5425
3. House contract = $230,000
4. Borrowing 100% of the purchase price
5. Interest only loan at 4.5% pa.
*Note:It is assumed for the sake of a working example that the stages of building happen in discrete months – in reality, some stages may happen quicker or more slowly. It is also assumed that construction and interest payments are made within the boundaries of one financial year. Depending on when the settlement date is, it may cross over two financial years.
When we consider the difference between purchasing a single or a 2 part contract for the same value:
Had the purchase been a single contract at $430,000, the stamp duty would be levied on the entire purchase price = $13.475
The house and land duty payable on the land is $5425 but the debt has to serviced during construction bringing the total outlay to $14,916
While the outlay is similar, the advantage for house and land contracts is that the interest during construction component of the total outlay ($9491) is tax deductible in the financial year it is incurred providing immediate tax relief.
Stamp duty is considered a capital cost, or a sunk cost. You cannot claim it against your tax until it comes time to exit and calculate your CGT liability.
For someone who is looking not only for capital growth and rental returns but also tax minimisation, a house and land package can be a appropriate strategy.
The ATO ruling on the tax deductibility of interest during construction is clear:
“Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out”. (page 15 Interest on loans)