Real estate: the biggest reason why owning it makes you richer

Sinking property values may prompt people to question their purchases, but just one word explains why real estate rules all assets.

Home values are falling across Australia as 2022 nears its end, and are forecast to fall further in 2023, but there’s one huge reason why owners should be happy to hold to their property.

It’s tax. Whether you’re a homeowner or investor, tax benefits provided by real estate deliver unmatched financial help.

Combine it with the long-term growth of real estate values, despite short-term dips such as today’s, and real estate owners are winners.

Here’s why.

TAX-FREE GAINS

Owner-occupiers do not pay capital gains tax (CGT) on their principal place of residence, and investors get a 50 per cent discount if they hold an asset for more than a year.

CGT is not a specific tax rate but involves adding the profit on an asset sale to a person’s taxable income for a financial year.

Property’s CGT status means tax savings of tens – sometimes hundreds – of thousands of dollars. For example, if a $600,000 property doubles in value over a decade to sell for $1.2 million, the tax savings for an investor are up to $141,000 while an owner-occupier pays zero tax.

For the wealthiest real estate owner-occupiers, this tax break delivers multimillion-dollar savings.

Tax breaks mean property wins hands down for growing and storing wealth. Picture: iStock

NEGATIVE GEARING

Investors can claim a tax deduction when their holding expenses exceed the income generated, and property has plenty of expenses including interest, council rates, insurance and property manager fees.

A negatively-geared investor still loses money, but eventually income should rise above the expenses – which is called positive gearing and should be the aim of everyone.

FREE DEDUCTIONS

There is another big tax deduction available for real estate investors, and it costs them nothing from their own pocket.

Depreciation of items including curtains, carpets and appliances can be claimed when the item or property is new, while investors can also claim capital works deductions, which are essentially the cost of the bricks and mortar.

The write-off rate for capital works deductions is typically 2.5 per cent a year, which for a $300,000 building costs equates to $7500 annually without stripping a dollar from investors’ hip pockets.

SUPER FUND SAVINGS

Superannuation is the other great tax break available to Australians, with 15 per cent maximum tax payable while saving for retirement, and usually zero tax once you’ve retired after age 60.

This has prompted people to start self-managed super funds and buy residential real estate within their SMSF. While the rules stop them living in these SMSF investments, the strategy can deliver the same tax-free capital gains as owner-occupier enjoy, potentially saving hundreds of thousands of dollars.

PENSION POWER PLAY

Once you retire, stop paying income tax and start earning a full or part age pension, your home is still delivering you financial benefits.

The pension assets test does not count your own home, which means you can potentially own a $3 million McMansion and still get a full pension. Non-homeowners are allowed an extra $224,500 of assets and still receive the full pension.

You won’t find many properties today valued below $225,000, so home ownership among seniors clearly has an advantage, just like it does for every other Australian when it comes to tax.