Demystifying Real Estate Terminology.

Investing in real estate can be a powerful wealth-building strategy, but it comes with its own set of unique terms and concepts. To help you navigate the world of property investment in Australia, we've put together a comprehensive guide to some essential terms and strategies such as; capital gains, negative gearing and positive gearing. We'll also delve into the tax implications and benefits associated with these concepts.

Defining Essential Terms in Property Investment:

1. Capital Gains:

Definition: Capital gains refer to the profit made from selling an asset, such as real estate, at a higher price than the purchase cost.

• Tax Implications: Capital Gains Tax (CGT) is levied on the capital gain when a property, not your primary residence, is sold. However, a 50% CGT discount may apply if you've held the property for more than 12 months.
• Benefits: Capital gains can provide you with long-term wealth as property values appreciate. If the property is your primary residence, it's exempt from CGT.
• Government Resource: Australian Taxation Office - Capital Gains Tax

2. Negative Gearing:

Definition: Negative gearing involves purchasing an investment property where the rental income is less than the expenses, resulting in a net loss.

• Tax Implications: The losses from negative gearing can be used as tax deductions against your other income, reducing your overall tax liability.
• Benefits: Negative gearing allows you to build wealth through long-term capital appreciation and it can provide significant tax savings.
• Government Resource: Australian Taxation Office - Negative Gearing

3. Positive Gearing:

Definition: Positive gearing occurs when the rental income from your investment property exceeds all related expenses, resulting in a net profit.

• Tax Implications: You may have to pay tax on the income generated from positively geared properties.
• Benefits: Positive gearing provides a regular income stream and is generally considered lower-risk due to stable cash flow. It can be valuable for covering living expenses and diversifying income.
• Government Resource: Australian Securities and Investments Commission - Property Investment

Other common real estate terms

• Appraisal: Appraisals are to be used as a guide to property value and allow you to get a better understanding of a possible selling price. An appraisal can be carried out by any real estate professional with no fee for the service.
• Body corporate: The name given to the party representing a group of owners, usually for strata properties.
• Contract of sale: a binding agreement that relates to the sale of a property and outlines terms and conditions relevant to that sale.
• Conveyancer: A licensed professional who specialises in providing advice and information about the sale of a property. A conveyancer may also be a solicitor.
• Cooling off period: A specified period after signing the contract on a property in which you can back out of the sale.
• Date of settlement: The date on which final payment is made to complete the transaction and the title is transferred from the vendor to the buyer.
• Exchange of contracts: The process of creating a binding contract for the sale of a property between the seller and the buyer.
• Guarantor: A person who agrees to take over loan payments or fulfil other contractual obligations if the borrower fails to do so.
• Lender's Mortgage Insurance (LMI): A fee paid by the borrower for the lender to insure themselves if the borrower can’t meet payment obligations. This usually applies to loans with a Loan to Value (LVR) ratio of over 80%.
• Loan to Value Ratio (LVR): The ratio of a loan to the value of the property. For example, a loan size of $500,000 for a property worth $550,000 makes for an LVR of 91%.
• Sellers’ market: Market conditions where an under-supply of properties drives up property prices, giving sellers an advantage.
• Settlement: The completion of a property purchase where the buyer pays the total amount of money owed to the seller in exchange for taking over legal ownership of the property.
• Stamp duty: A state tax paid by a buyer on some contracts, including property. The amount of stamp duty payable is calculated based on the contract price of the property on settlement day.
• Title: A document outlining particulars and ownership of a property.
• Valuation: A valuation is used for legal or banking purposes to determine the current value of a property. To obtain a valuation, a formal report is created by an accredited valuer who has gone through the necessary training.

Before embarking on a property investment journey, it's vital to comprehend these essential terms and the tax implications associated with each strategy. We recommend consulting with financial advisors or tax professionals to tailor your investment approach to your specific financial goals and risk tolerance.

For further information on tax regulations and property investment, consult the relevant government resources linked above. Staying informed and up-to-date with changing tax laws is essential for making informed property investment decisions.

We hope this helps you navigate the intricacies of property transactions more effectively. If you have any further questions or need clarification on any of these terms, don't hesitate to get in touch with us at Cornus Developments. We're here to support you in your real estate journey.

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