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Buying 'off the plan' property

Ahead of any future interest rate rise, which could spook property market players or potential players, there are early signs that real estate is getting back on the investors' radar screen.
At such a time as now, you can see ads for buying property off the plan. My advice is don't rush into anything without doing your homework.
In a nutshell, plan for doing anything off the plan (O-T-P).
What does buying O-T-P mean?
Purchasing property O-T-P means putting down a deposit before construction begins and making up the rest of the payment on completion.
This can be a play for home-owners, potential landlords and speculators who hope for capital gain between paying the deposit and finally settling and taking possession of the property.
What are the benefits?
The benefit for the developer or builder is that strong pre-sales before they start reduces risks, and can help secure money at good rates of interest. To a buyer, the big appeal of this strategy is that you could buy cheaply, and over a year or so, pocket the capital gain.
How does the deal work?
Generally, the deal works by paying a 10 per cent deposit on signing the contract. This deposit should be held in a solicitor's legislated trust account for safety, and bear interest usually divided equally between the buyer and seller on completion. There will also be a stamp duty charge.
The fixed purchase price is a plus, but you're in the hands of the builder and delays can occur when things go wrong.
Are there tax benefits?
Yes, if you purchase as an investor/landlord there are depreciation tax savings including the depreciation on the building, furniture, fixtures and fittings. The Australian Tax Office website actually tells landlords what can be tax deductible.
Be careful!
And while some people have done well out of O-T-P plays, I have to say loud and clear - buyer beware! Before signing anything and handing over money, read the contract and get a good lawyer.
Study the proposed property, get inspections done where necessary, ask questions until you have no doubts and pay for professional help.
Switz tips
Here are some important issues about what you should be aware of before purchasing O-T-P:
1. Look closely at the developer's credentials. I like well known companies with a great track record for quality and delivery. Their profitability and professionalism is crucial to your outcome.
2. Contact the builder's licensing bodies to see if complaints have been lodged about the developer.
3. Make sure your lawyer is confident that your deposit is safe.
4. Look carefully at what the models and plans of the property are telling you about the property. Be confident about the details, the fixtures, fittings and finishes promised in the contract. These can be tricky, so again, consult a good lawyer.
5. For the buying process, there's a good rule of thumb - the best properties sell fast. If you come in late, make sure you're not buying a pig in a poke!
6. If you're going to rent the unit or property bought O-T-P, the deposit, legals and other incidentals associated with the acquisition of the property are added to what's called the 'cost base'. If you ever sell, this is deducted off your capital gain to reduce the capital gain tax payable. The interest you pay on money borrowed for the deposit should be tax deductible if you can prove that your sole intention is to rent out the entire property on settlement.
From the time you own the property (settlement), you can claim depreciation on fixtures and fittings, a capital allowance on the building and interest paid on the entire amount financed, council rates, repairs, etc as tax deductions.
Some taxing matters
There's a six-year exemption, after which capital gains tax applies. If the property is newly constructed, you must move in for three months to get the exemption! But for existing properties, there's no time period to move in. But note, this only applies if the O-T-P property is the only place you own and therefore it's your principal residence.
Now doing this could mean your deposit and other costs before settlement wouldn't be favourably treated tax-wise, as described above.
And it could harm your access to the first homebuyer grant by becoming a landlord first.
Furthermore, being a landlord can mean you have to pay land tax.
Off the planet!
Be aware all of these issues, as they can change the relative profitability of buying an O-T-P in different ways. For instance, a first home buyer could be better off moving into a property that picks up a big capital gain, to access the grant and to avoid paying a capital gains tax.
A final word

Do your homework, find out all of the costs, seek expert advice and evaluate all of the risks. Then you're in a better position to cash-in on any upcoming improvements in the real estate market. 

Published on: Tuesday, May 01, 2007

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