A big advantage of homeownership and property investing is tax advantages.
Hands off the family home
Some say that homeownership is the last great tax shelter for Australians. The family home or as the ATO says the principal place of residence (“PPR” for short) is excluded from the CGT (Capital Gains Tax) net by dint of social policy and political survival.
No politician would change the rules on this without suffering a pretty big backlash!
Rolling family home gains forward
You can buy a home, sell it, then buy another one, and keep doing this as many times as you like – all while never paying capital gains tax (GCT) as long as you have lived in the home as your principal place of residence and that you owned it for at least 365 days.
This is not possible with any other type of asset.
Think about those footballers moving into mansions, renovating them, and moving out! They are doing this ‘roll-forward’ strategy and its a good way to build wealth, if you can afford to cover the stamp duties and also be mobile with your work.
Another great thing about your own home is that any improvements to the home are usually free of capital gains tax. Improvements to the home are also CGT-free, so if a $100,000 improvement creates $150,000 of value, that extra $50,000 is tax-free.
The Australian Master Financial Planning Guide 2015-16 (Walters Kluwers) recognises other advantages of housing. These include:
- Providing security and stability. The alternative to homeownership, which is renting, may involve the owner selling the property (and the renting family having to move…)
- Avoiding the stigma that some feel if they do not own a home (this is partly why the housing affordability debate is so fiery at times, I’d imagine);
- Providing lifestyle choice even where wealth creation is not the primary objective;
- Paying off the home loan is a form of personal saving; and
- Freedom to make personal changes to the property.
What are some of the disadvantages?
Although Australian property has historically been a very stable and familiar asset, some critics say the residential property is not a liquid asset.
This has become less of a problem in the past 10 years because equity access loans (debt facilities linked to the value of the home) allow clients to ‘cash out’ some of the value of their home, whether for consumption, investment or business purposes.
The Australian Master Financial Planning Guide 2015-16 (Walters Kluwers) recognises other potential disadvantages as including:
Property prices can fall, as well as rise:
Demand for property may be lower in the future due to:
- Low inflation, which reduces the potential for high capital gains;
- Increasing unemployment rates;
- More people deferring the purchase of the first home;
- The high costs of buying and selling property, including legal fees and stamp duty;
- The opportunity cost on missing out on other better performing investments;
- Lack of diversification;
- Property not being suited to investment;
- Miss out on other tax concessions, even though homes are CGT free; and
- Homes are illiquid, i.e. hard to convert to cash.