Pay Tax? Not on Investment Property: Here’s Why

Not only can I show you why you may never pay tax on an investment property, I’m going to explain why the government is happy for you to do that too.

Keep in mind (as always), this is by no means advice. Talk to your accountant before making any decisions for yourself!

The formula is simple:

"If you buy a Blue Chip investment property, never ever sell." - Chris Gray - Your Empire

Here’s how it works…

After you buy a property, that property increases in value.

Let’s say your $1m property goes up in value 20% over a few years.

Congratulations. Now you have a property worth $1.2m. That means your property has made $200k.

But that money isn’t real, right? At least not until you sell it?

Wrong.

The money is very real and is referred to as “equity”. Equity is the amount of value that you own in a property if theoretically you sold the property and paid out your mortgage (of course the bank wants their money first).

So why wouldn’t you sell the property and take the money?

Let’s be honest… the government loves taking their share of tax from almost anything they can.

  • A company pays payroll tax on wages
  • You pay tax income tax on your wages
  • Then with the money left over, you pay the gst on almost anything you buy
  • Heck, there are even additional taxes on specific items you buy like:
    • Fuel
    • Or you really could refer to your road tolls as a tax as well

So that’s tax on the tax on the tax on the tax.

So how do wealthy investors pay zero tax on their property equity, but can still access their money?

The trick here is that the only money from the increase in property value that is taxed, is “capital gains” from the difference in value of the property from purchase to sale.

"If you never sell the property, you never realise the capital gain and you never pay tax." - Chris Gray - Your Empire

Can you see the difference now between “equity” and “capital gains”?

This can definitely be difficult and the more property you own, the harder it is.

So even though it can be tricky and certainly not obvious if you don’t know who to speak to about it… you know what I always say…

The key to accessing your equity is “serviceability” or proving to the lender that you indeed have the income to pay off any debt you have.

Even if your property is increasing in value at a rate that is faster than the interest you owe, you still need to show serviceability to the lender, because they want to know that no matter what happens to that property, they still get paid.

So if you were wondering why I continue to work despite my portfolio being worth over $20m, congratulations. You just figured out my secret.

Company income (including from Your Empire) allows me to show lenders I have an income outside my property investments that allows me to service my loans.

Because they are happy that I can pay my debts, they are happy to loan me money.

For an investor early in their career, refinancing can be pretty straightforward if you have a good job and a safe, steady income that is easy to prove.

However… you can certainly run into challenges early as well.

This is where a good mortgage broker is worth their weight in gold. A good mortgage broker will explore all options for ways to access your equity and it doesn’t stop at the “big 4” banks.

“2nd tier” lenders can be more flexible in their terms and offer opportunities not afforded by the big banks.

If you are confident in your numbers and have cash buffers in place, access to equity can help leverage your portfolio and continue to make money on money… without paying tax.

Even when 2nd tier lenders say “no”, there are still options.

3rd tier lenders, private equity, the list goes on.

Sure, you might pay a higher interest rate, but if you sit down and run your numbers, often it can be far more advantageous to access your equity at even an inflated rate. But that’s a story for another time… and for advanced investors.

If that’s you, we’re happy to talk and share what we know. Book a chat with our team for a more detailed conversation. Who knows what a simple conversation could be worth?

Sometimes you just have to think outside the box.

Now, back to the equity:

  1. You’ve proved to the lender you are able to service the new loan
  2. You borrow against your equity
  3. You set aside some for a cash buffer (emergency fund), buying costs and the rest becomes a deposit for the next property
  4. Then you get a loan for the new property
  5. Put a tenant in the property to help pay the mortgage
  6. Then follow the same steps over and over again

Once you have purchased the new property, of course you put a good tenant in there asap. Remember it should be the tenant who pays the bulk of the mortgage. Not you.

Over time (sometimes years, sometimes decades), your property likely continues to grow in value. Rents slowly increase and eventually your rental return may overtake your mortgages.

In this scenario, all the time you are growing your equity, whether you like it or not.

Imagine a portfolio which allows you to access equity and even if you use that equity to fund your lifestyle, the equity in your portfolio is growing at a rate faster than you can spend it (even after you’ve set aside enough for the interest repayments in advance).

That’s a successful portfolio. It should make your head spin when you wrap your mind around it.

And the best part is that you likely never pay tax. Not $1. As long as you never sell.

The government wants people (and companies) to invest in the economy. Investing in the economy helps growth, creates more jobs and… you guessed it… helps other people earn even more money to pay even more tax.

And the government loves tax.

If you use your drawn equity to make other investments, then the interest you pay should be deductible.

If you use part of that equity to help fund your lifestyle or pay off credit card debts, that interest won’t be deductible.

Are you the type of person that reads this and thinks it’s unfair that wealthy people get tax breaks or the type of person that wants to understand how they can get the system to work for them?

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