Property wealth secrets: How the rich make millions tax-free
Secrets that rich people use to power up their property wealth can be copied by anyone who understands tax, investment and the power of time.
Rich people grow real estate wealth much faster than other Australians, and a key secret to their success is not actually a secret at all – in fact, it’s something we can all practice.
In his new book Property Secrets of the Rich, chartered accountant Allan Mason says while investing in property is not the only way to become wealthy, it “generally beats other methods”.
Mason, a former accountant for the late Kerry Packer in the 1990s when he was Australia’s richest person, says the biggest tax haven of wealthy people is often the same as everybody else’s – their own home.
That’s because, unlike other investments, there is no capital gains tax payable on the increasing value of your principal place of residence, so use its tax-free status to grow your asset base, he writes.
Thinking big pays off, and numbers don’t lie. For example, if an $800,000 home doubles in value in a decade, the owner makes an $800,000 tax-free capital gain, while an $8m home doubling in the same time period delivers an $8m capital gain – free of tax.
Property Secrets of the Rich is Mason’s 10th book and he says he wrote it with “no agenda other than sharing what I know to be true and what I have personally experienced”.
“Most people who are wealthy do own their own home and have no debt on that,” he says.
However, they use debt wisely to fuel their investment growth, and combine it with tax-saving strategies to multiply wealth.
“As an asset class, property has some major benefits that many other asset classes do not have,” Mason says.
“Certainly there is the negative gearing associated with property. When you add depreciation this benefit is multiplied.
“The other aspect is being able to be creative with tax planning, something you cannot do easily with asset classes. For example you can prepay interest on your properties, if in one year you have a CGT event or are facing a large tax bill.”
Mason’s new book says high-net-worth people never accept that nothing can be done about tax, and always look for an advantage.
“Use the system, like tax incentives, depreciation, gearing and the power of time,” he writes.
“You just need to change your thinking about debt and use it as a method to accelerate your wealth.”
However, always make sure you can meet your loan commitments, to avoid becoming a victim of the banks. And remember that debt becomes less relevant over time as inflation pushes prices up while the original investment loan size stays the same or reduces.
“Use the equity in your mortgages to buy more investment properties because, quite simply, the more properties you own, the greater your exposure to long-term property growth,” Mason writes.
Another secret comprises two key words: never sell. Property owners typically experience two or three cycles of massive gains during their lifetime, followed by levelling off periods, Mason writes. Compounding investment returns grow over years and decades thanks to “the power of time”.
“Kerry Packer always owned all of his properties … he rarely rented any business premises. He considered rent as dead money.”
While property investors often cop a lot of criticism and fear more government meddling with tax rules – particularly around negative gearing – Mason does not think there will be changes to the system.
“The government ruled it out before the last election,” he says.
“Properties do move into positive gearing in time, following an initial period of negative gearing where costs outweigh income and the investor can claim a tax deduction for the difference.
“Everyone says you are subsidising the rich and have all these incentives for the rich, and we should hone back the system to look after poor people, but it’s actually not true,” Mason says.
“A lot of rental properties are owned by nurses, police, a large percentage is owned by your average person. It’s just not true that they’re all owned by wealthy people.”
So what is his top piece of advice for anyone wanting to get rich using property?
“Just start, start anywhere,” he says.
“The younger the better, but it is never too late to start. The key is to save for the first deposit. Then over time continue to acquire, one property every five years – or less depending on the property cycles.
“In the projections in my book, if you purchased one property every five years at say $1m each property, your property portfolio in 25 years would be worth $24.7m in future dollars. Even if you borrowed 100 per cent, you would only owe $5m on that portfolio.”
Property Secrets of the Rich will be published on August 26 by HarperCollins, a division of News Corp, which owns The Australian.
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