First home buyers are increasingly turning to property investments as they are priced out of the homes they want to live in.
House prices have surged more than 20pc over the past year, CoreLogic data shows.
According to CoreLogic, lending data appeared to show that some first home buyers were responding to the surging prices by turning to property investment as a way to get a foothold in the market.
This is commonly known as rent vesting, which generally means you buy where you can afford and pay rent where you want to live. The general idea is that the property you bought will hopefully increase in value and you will eventually be able to trade up for a more desirable property in a better location.
This brings up a very important topic around taxation. You may be aware that you can sell your main residence and not have to worry about capital gains tax (provided you tick all the boxes).
However, if you sell an investment property, you normally have to pay capital gains tax on the profit you make. For example, if you made a profit of $500,000, depending on your situation, this could result in a hefty tax bill of up to $120,000. Ouch!
However, with the right strategy and planning from the start, you could maintain the tax-free status on the property (even if you rented it out for a period and received income from it).
This could mean saving $’000s if you sold it down the track. With all that tax saved you are well on your way to buying a home in your dream suburb!
As this is a highly generous concession, there are many rules and complexities – so be careful and get advice from an expert on your specific situation. You would need to be planning this from the start.
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