Stamp duty vs land tax: First Home Buyer Choice explained

First Home Buyer Choice was launched on 11 November 2022 with the aim of helping NSW first home buyers get into the market sooner. It gives first home buyers who spend up to $1.5 million on a home or $800,000 on vacant land the option of paying an annual property tax rather than one-off stamp duty. The property tax can be paid quarterly or annually much like council rates.

It’s worth noting that some first home buyers in NSW already may pay zero stamp duty or a concessional rate of duty, depending on the value of their first home.

As the table below shows, first home buyers pay no stamp duty at all if they buy a new or established home costing less than $650,000, or vacant land priced below $350,000. A concessional rate of duty is paid on homes valued between $650,000 and $800,000 or vacant land valued from $350,000 to $450,000.

The introduction of First Home Buyer Choice doesn’t impact these stamp duty savings.

NSW first home buyers who can pay zero or concessional stamp duty

← Mobile/tablet users, scroll sideways to view full table →

Source: NSW Office of State Revenue

Why was the First Home Buyer Choice introduced?

NSW is Australia’s most expensive state to buy a home in. Sydney’s median values – $1.26 million for houses and $783,406 for apartments, according to CoreLogic – far exceed the limits to pay zero stamp duty. Even in regional NSW, the median value is $729,528 for houses.

This can see first home buyers struggle to find a property that doesn’t come with a significant stamp duty bill. As a guide to how big the stamp duty hurdle can be, a first home buyer looking at a property costing $850,000 needs to budget for $33,340 in stamp duty.

The stamp duty impost, along with high property prices, has contributed to a decline in homeownership across NSW – it has dropped from 70% in the 1990s to about 64%.

First Home Buyer Choice aims to eliminate the need to save for stamp duty, thereby helping first home buyers buy a place of their own sooner.

Am I eligible for First Home Buyer Choice?

First Home Buyer Choice is only available on homes priced up to $1.5 million or vacant land worth up to $800,000. No income limits apply to the scheme but you must be aged over 18, be an Australian citizen or permanent resident, and you need to buy your first home as an individual (not a company or trust).

The scheme is only open to buyers who haven’t previously owned residential property in Australia. Once you buy your first home, you need to move in within 12 months of purchase and live there for at least six consecutive months.

First home buyers who purchased a home before 11 November 2022 are not eligible for First Home Buyer Choice.

How much can I save with First Home Buyer Choice?

Buyers who opt out of upfront stamp duty will pay an annual property tax based on the land value of their home as determined by the NSW Valuer General.

The tax rate for 2022-23 and 2023-24 is $400 plus 0.3% of land value. From 2024-25 the tax rate will be indexed in line with average annual incomes, though the maximum increase in any given year is capped at 4%. Bear in mind, the value of the land is likely to rise over time, which can increase the tax payable.

To see how this property tax compares with stamp duty, let’s say a first home buyer pays the Sydney-wide median house price of $1,257,625. We’ll also assume the land component of the property is worth 60% of the overall value – about $754,575.

Upfront stamp duty on the home would cost $53,374. By contrast, the property tax in the first year would come to just $2,664. That’s $50,710 less than upfront stamp duty.

If the homeowner stays in the same property for 10 years – about the average time according to the NSW Treasury – the total paid in annual property tax over the decade will work out to $29,989. That’s still $23,385 less than the one-off stamp duty. Even if the place is held for 15 years, the homeowner would be $5,231 in front by opting for an annual property tax instead of stamp duty.

The longer you own the same home, the more the tax pendulum shifts in favour of stamp duty. As the table shows, if you live in your first home for 20 years, opting for an annual property tax could mean paying $68,796 over two decades – $15,422 more than stamp duty.

NSW stamp duty v property tax example

← Mobile/tablet users, scroll sideways to view full table →

Source: www.canstar.com.au – 14/11/2022. Median Sydney House Price based on CoreLogic Home Value Index (October 2022). Assumes property tax is charged on the property’s unimproved land value, where the land value is assumed to be 60% of the purchase price. Land tax is assumed to be $400 plus 0.3% of unimproved land value, charged per annum; with the $400 amount increasing by 3.2% p.a. per NSW Treasury assumption. Stamp duty is calculated based on Revenue NSW First Home Buyers Assistance Calculator. Property price and land value is assumed to increase by 2.5% per annum. The analysis and outcomes are for illustrative purposes only.

How can I work out if I’m better off paying an annual tax or stamp duty?

An online calculator is available through Service NSW that lets first home buyers assess their options. You’ll need to provide the address of the home you’re thinking of buying as the calculator uses this to determine the land value on which property tax is based.

Will stamp duty ever work out to be cheaper?

There can be circumstances when paying upfront stamp duty works out cheaper than an annual tax. The closer the value of a property is to the stamp duty-free threshold – that’s $650,000 for a home or $350,000 for vacant land – the greater the likelihood you could be better off choosing to pay stamp duty.

An example here will help. Let’s say you’re thinking of buying a house in Blacktown in Sydney’s west. The place is advertised for $700,000 and has an underlying land value of $554,000. This land value doesn’t change regardless of how much you pay for the property.

If you buy the home for $700,000, the stamp duty bill will be $10,363. If you opt to pay the annual property tax, the cost will be $2,062 in the first year. So, after five years, you will have paid $10,310 in total property tax. From year six onwards, the property tax outweighs the one-off stamp duty.

Now, let’s say you’re able to negotiate the price of the house down to $680,000. In this case, the property tax in year one will still be $2,062, but stamp duty will have dropped to $6,218. So, in just three years you will have paid almost as much in total property tax ($6,186).

This highlights the value of negotiating hard on price and using the First Home Buyer Choice calculator to make an informed decision rather than just assuming you’ll save with an annual property tax.

What if I buy my first home before 2023?

First Home Buyer Choice fully kicks in from 16 January 2023. From that date, first home buyers who purchase a home can choose to pay either property tax or stamp duty as long as they make a decision before the purchase settles.

The situation is a little different if you buy a first home between 11 November 2022 and 15 January 2023. You can still opt into the property tax but if the purchase transaction settles on or before 15 January you’ll need to pay upfront stamp duty and then apply for a refund of duty after 16 January. If the property purchase settles after 16 January, and you have chosen to pay property tax, there’s no need to pay stamp duty.

Is First Home Buyer Choice the same as land tax?

First Home Buyer Choice works in much the same way as land tax in that it is based on the value of the underlying land.

However, in NSW land tax is not applied to your principal place of residence. It chiefly applies to investment properties, vacant land and holiday homes. In addition, tax rates for land tax differ from the property tax that applies to First Home Buyer Choice.

What impact could First Home Buyer Choice have on house prices?

The Australian Housing and Urban Research Institute (AHURI) looked at the impact of government policies designed to help first home buyers buy a place of their own sooner.

It found that in the decade to 2021, more than $20.5 billion was spent by Australian governments in stamp-duty concessions and cash grants to assist first home buyers. The catch is that most of these schemes involved demand-focused measures. As AHURI noted, this feeds further house price increases, and in turn, spurs calls for further first home buyer assistance.

A report by the National Housing Finance and Investment Corporation found that removing stamp duty in favour of a land tax will likely lift property prices in the short term. However, it added that the impact of the scheme could be “negligible” if lenders take annual property tax payments into account when determining how much they lend to a first home buyer. Put simply, buyers could find their borrowing power is reduced if they opt to pay a yearly tax.

Importantly, First Home Buyer Choice doesn’t take steps to increase the supply of new homes. CEO of the Real Estate Institute of NSW, Tim McKibbin, said, “Until real measures are introduced to address the undersupply of housing, prices will remain out of reach for many aspiring first home buyers.”

In terms of the lasting impact of First Home Buyer Choice on the property market, it really is a case of watch this space.

Compare home loans

Cover image source: Monkey Business Images/Shutterstock.com