My partner and I are venturing into our first sub division project. We are close to the end of our due diligence period and trying to establish the best way to apportion our mortgage/title for the project, to achieve the best tax outcome. Currently I am the highest income earner however this will change throughout the life of this project (projected 12 – 18mths) and my partner will then have the higher income. Therefore how do we apportion the mortgage to reflect this from the beginning? We are both confused as the property will be negatively geared throughout the project and then we will be selling as a profit therefore it will be positive. When & how is the critical time to apportion incomes and HOW DO YOU DETERMINE THE APPROPRIATE PERCENTAGES??? Anyone who can help…it would be greatly appreciated. Akeiva
Hi akeiva,
You seem to be confused between an investment property and undertaking a development project. Forget negative and positive gearing, that has to do with investment properties. You are proposing to undertake a development with the expectations of making a profit. It's the profit (hopefully) you will pay income tax on – when it is realised.
The entity (individuals, company, trust) which owns the land and undertakes the development will be what is taxed. I assume that same entity will also be the borrower and guarantor of the development finance.
You have said you are undertaking due diligence. Do you have the site under contract? Do you already own it? At present the name on the contract, or title if you own it, is the entity that will be taxed on the profit and borrow the finance.
I suggest you go to my website and download my free e-book "Getting Started in Property Development". Getting the right structure is something that should be sorted out at the very beginning – before even looking for a site. This is where a good property lawyer or accountant with experience in tax effective structures for investors and developers can be valuable.
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