How land tax impacts property investments

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With the recent rise in property prices, land tax is looming as a bigger issue for many property investors. (Noting there is not land tax on your PPR). When we see a sharp rise in property prices what is actually rising is the land value. The replacement cost of the buildings on that land may rise incrementally or decline as buildings often depreciate over time depending on their quality and architectural appeal.

The value of an apartment, comprises a relatively small percentage of land value comparted to a house, which is part of the reason apartment values don’t tend to rise at the same rate as houses. While this may seem like bad news for investment owner there is also good news.

In Victoria, land tax is levied on investment property with a site value (land value only) over $250,000. Therefore, for many apartment investors, land tax is not even on their radar. But for property investments with a larger land component, the recent surge in property values is going to cause some real headaches when the land tax bill hits their inbox. While it may be argued an increase in land tax is offset by an increase in total capital value, many investment owners live off the income of their real estate and are relatively asset rich and cash poor, making the land tax bill problematic. Also land tax is calculated on a multiple holding basis across all assets, ignoring variations in holding entities with common beneficial interests. Additionally the $250,000 threshold is quickly surpassed.

Land tax for Absentee owners is calculated at a higher rate than Australian tax payers. As an example, (using the SRO land tax calculator), a property investment with a taxable value of $500,000, will incur a land tax bill of $10,775 for an absentee owner, compared to $775 for an Australian tax payer. (using a 2022 assessment year). This was highlighted in a recent SMATS Group (Australian Property, Tax and Financial advisers) news article.

This enhances the case for the income return attributes of apartment investments, and with rents rising this will continue to improve throughout 2022.

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Apartments Made Easy

Written by a 4th generation real estate agent Apartments Made Easy gives you the tools and tells you all you need to know about how to buy, sell, own, lease, and manage your apartment successfully.

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