There are a lot of myths and conventional ‘wisdom’ that surrounds buying property in Australia, most of them based on emotion rather than the cold hard numbers.

Let me explain.

Under the investing and tax rules in Australia, you receive no tax breaks for buying a home. You save your deposit with after tax dollars. You pay your purchase costs with after tax dollars. You make your mortgage payments with after tax income. And you fund all your ongoing property costs with, you guessed it, after tax dollars.

If instead you were to buy the same property as an investment, things are different. The government wants people to invest successfully so they rely less on government benefits in the future, so they incentivise people to do this through the tax system.

When you buy an investment property, all of your ongoing costs are tax deductible. Your mortgage interest costs, the cost of maintenance and repairs, your council or strata rates, and any other costs relating to the property are fully tax deductible.

When you claim these costs as a tax deduction, you don’t get the full amount back, but you do receive a refund at whatever your marginal tax rate is. If your income is above $45,000 your tax rate will be at least 32.5 per cent, and could be up to 45 per cent if you’re on the top marginal tax rate.

This means that you’ll receive a refund for the expenses of at least 32.5 per cent, almost a third of all property expenses, and it could be as high as almost half of every dollar you pay.

This makes a big difference. Let me explain with some numbers.

If you were to buy a property at the Australian average property price of $732,886, under current interest rates of 6 per cent, your annual interest costs would be around $43,973. On top of that, you’d be up for ongoing property costs (read rates, insurance, maintenance) of around $7,329 each year. That makes total costs of $51,302.

Based on average rental rates around Australia, if this property was an investment you’d receive rental income of around $29,315 each year. This means that as an investment the total cost to you total income ($29,315) less total costs ($51,302) = $21,986.

But with an investment property, because you’re able to claim a tax deduction for these costs, assuming your tax rate is at least 32.5 per cent you’d receive $7145 back in tax.

The implication here is that if you buy the exact same property as an investment property, you’ll be $7145 better off each year. You can then use this extra $7145 to save, invest, or pay down your mortgage faster.

When to buy your own home

Owning your dream home is an important part of true money success, and something that’s achievable for everyone who’s prepared to put in the work to make it happen. That being said, it’s important your home is something that’s realistic for the financial position you’re in, specifically that your spend on your dream home is consistent with the financial trajectory you’re on.

Careful and considered planning is your friend here, and the more you want to spend on your home, the more important this planning is. For your home purchase, you need to make sure you’re able to pay off any mortgage on this property in a time frame you’re happy with and live the lifestyle you want and still build your investment assets at the rate you need to get where you want to be when you want to be there.

The wrap

Buying your own home does come with an additional cost on top of what it would cost you to buy the exact same property as an investment. This means that before you buy your own home, you should make sure you can afford this extra cost and still do all the other things you want or need to do with your money.

If you buy your dream home at the wrong time in your journey, you’ll seriously slow down your rate of financial progress. Timing is everything. Some number crunching is needed here. And if the numbers don’t stack up, it means that now isn’t the right time to buy your home.

If now isn’t the time to buy your home, all is not lost – it’s an opportunity for you to focus instead on building your investments and wealth, and it’s likely you’ll be able to make faster progress without tying up a big chunk of your savings or paying a mortgage with your after tax income.

Ben Nash is a finance expert commentator, financial adviser and founder of Pivot Wealth, creator of the Smart Money Accelerator program, author of ‘Replace your salary by Investing’, host of the Mo Money podcast and runs regular free online money education events, you can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.

Originally published as Buying property to invest could save you $7145 a year in tax