Don’t get fined $30,000 for moving house!
“A citizen can hardly distinguish between a tax and a fine,” wrote G.K. Chesterton, “except that the fine is generally much lighter.”
In Victoria, for example, the stamp duty payable on the purchase of a $600,000 house-land package (below the median price for Melbourne) is more than $30,000 — or about 150 times the fine for fare evasion on public transport.
Suppose you’re a home owner. And suppose you need to relocate in order to take up a new job. Are you going to sell your present home, paying a 5-figure sum in commission, and buy another one, paying the stamp duty plus conveyancing fees? How many months’ pay will that burn up? How cranky do you get when a shonky fine, or even a fair-and-square one, costs you a few days‘ or a few hours‘ pay? That new job had better be good!
But if you let out your old home to tenants and rent your new address, there’s no change of ownership, so you pay no stamp duty, no commission, and no conveyancing fees.
After that, every time you need to move, you can do it in the rental market without incurring stamp duty, commission or fees.
But doesn’t renting give less security of tenure than buying? Usually, yes. But if the up-front saving in stamp duty, commission and fees is worth (say) a year’s rent, you can offer to pay a bit more rent in exchange for greater security or flexibility of tenure, and still come out in front. Being a property investor yourself, you’ll be seen as a good tenant, so you won’t have to pay much extra.
Yes, I said “investor”. As the landlord of your former home, you’ll be able to claim the full range of tax deductions that are available to investors but not to owner-occupants. In particular, you’ll be able to claim your mortgage interest, council rates, maintenance expenses, depreciation of the building, and body-corporate fees as deductions from your taxable income, even if the outgoing expenses exceed the incoming rent (“negative gearing”).* You can’t do any of that with an owner-occupied property, even if the expenses exceed the rental value — as they often do.
But why am I telling you this? Don’t I disapprove of the current negative-gearing rules? Yes — and I can think of no surer way to change those rules than to tell ordinary punters how to exploit them. The rules were designed for gentry who own at least two properties — one to live in, and at least one to invest in — not for riff-raff who can only afford to own one property at a time!
If you let out your home, won’t you start paying land tax and rental management fees? Probably; but that’s all income-tax-deductible too — unlike stamp duty, commission and conveyancing fees, if these are incurred on selling or buying your principal residence.*
If you live away from your property for long enough, will you have to pay capital gains tax on any eventual sale? Only if you actually make a capital gain! No such safeguard applies to stamp duty, commission or conveyancing fees.
Of course, if everyone adopts this strategy for avoiding stamp duty and maximizing income-tax deductions, governments will change the rules. In the mean time, early adopters will save a fortune — and settle a few scores over disputed fines.
* Conditions apply to the deductions mentioned above. Do not proceed without obtaining properly qualified advice.