From 16 January 2023 eligible first home buyers can now choose between paying the one-off Transfer Duty (stamp duty) upfront or an annual Property Tax on purchases of new or existing homes up to $1.5 million.
Eligible first home buyers purchasing existing homes up to $650,000.00 and new homes up to $800,000.00 will still qualify for the First Home Buyer Assistance Scheme (FHBAS) which provides full exemptions from transfer duty. Concessional rates will apply under the scheme for existing homes priced between $650,000.00 and $800,000.00.
The new First Home Buyers Choice Property Tax is relevant to those buyers purchasing houses in the $650,000.00 to $1.5 million bracket.
Property Tax is calculated on the Unimproved Land Value (ULV) of the property which can vary significantly based on the location. For example, a property in Western Sydney with a purchase price of $1.5 million and a ULV of $850,000.00 may incur Property Tax of $2,950.00 per year. However, a property of the same price in Armidale would likely have a lower ULV of $190,000.00 decreasing the Property Tax to $970.00 per year.
Service NSW have a Property Tax calculator on their website (link below) which not only calculates the estimated tax specific to the property address, but also compares the calculation of Transfer Duty vs Property Tax over a specified number of years.
Whilst the calculator is a great comparative tool, it is important for First Home Buyers to seek proper legal advice prior to purchasing as there are a number of issues that can result in a significant increase in costs if all factors are not considered.
Purchasers need to be aware that whilst the owner-occupied rate of Property Tax is 0.3% of the ULV annually, the rate increases to 1.1% when the property is not owner-occupied. Purchasing a property with a tenant in possession will be assessed at the higher tax rate until the owner is able to move in and have the property reassessed. Purchasers who intend to draw an income from the property through home-based businesses or rental income will also incur higher Property Tax assessments as the property will be deemed mixed-use.
To illustrate how different situations affect Property Tax, let’s consider the property in Western Sydney being purchased for $1.5 million with a ULV of $850,000.00:-
- Whilst owner-occupied by an eligible purchaser, the Property Tax liability will be $2,950.00 per annum;
- If the owner were to rent out three spare bedrooms, representing 40% of the floorspace, their annual Property Tax will likely increase to $5,240.00 per annum; or
- If the purchaser vacates and retains the property as a rental investment their annual Property Tax will likely increase to $10,850.00 per annum until they sell the property.
The First Home Buyers Choice is also relevant to purchasers of vacant land. Transfer Duty exemptions are available for vacant land up to $350,000.00 with concessions for land up to $400,000.00. Purchasers can opt-in to Property Tax on vacant land up to $800,000.00 providing construction of their principal place of residence commences within two years of ownership.
With many factors to consider, it is important to get expert legal advice specific to your situation and desired outcomes. Contact the team at Turnbull Legal Solutions to discuss how we can help you with purchasing your first home, explain your options and ensure that you get the desired outcome from one of the biggest purchases you will make in your lifetime.