Forum Replies Created
POSH is very good and very reasonably priced. It handles lots of properties – but not sure about GST. It should.
Regards
Megan
You have to pay Stamp Duty on any transfer of land. I’m not sure what you mean by “transferred in name” but I assume you mean with no physical money changing hands.
Unfortunately, as this is a transfer from one party to another, stamp duty is payable on the value of the property i.e. fair market value not what you say it’s worth!!
This also applies if you transfer a property from, say your name, to a company owned by you. The Revenue Offices in each state always get a piece!
Regards
Megan
There are certainly legitimate reasons for using a Hybrid trust and, properly administered etc, they’re AOK and above board.
But, please, don’t take advice from a “friend”. Get a specialist to advise you. Ed Chan from Chan & Naylor Accountants in Sydney is awesome. He’s an investor and developer himself and one of countries best and most respected advisors on structuring.
We find a lot of advisors forgot to take land tax into consideration when advising on structuring. Your structuring mechanism should consider this as well as impacts on CGT, Stamp duty and income tax.
There are different land tax rules in each state regarding Trust structures. Make sure you get it right or you might get yourself a big land tax bill each year!
Regards
Megan
I agree with Terry. You have to be very disciplined to work well with a LOC – the additional funds available at call seem to be very tempting for many people.
With your interest rate at 5.57%, I’d be staying put and follow Terry’s suggestions.
Megan
Tony
I agree with Terry re offsetting non-deductible debt and using offsets is a good strategy. As well, with our developments, we take some profit in cash (amounts that we can either offset against neg gear losses or amounts to keep our tax to a minimum and hold the rest of the profit in the properties.
Perhaps a mix of both, plus using the offset account, would allow you to pay down the non-deductible loan while still not having to forego 30%+ in tax.
Megan
Tony
I recommend you speak to Ed Chan of Chan & Naylor accountants. This guy really knows his stuff, he’s a developer himself and is amazing with structuring – probably one of the best experts in the country. Email me if you want his details.
I’d also have a think (and get some advice) about developing in your own name – not many developers do this and there’s a good reason why.
Your idea about selling to Family Trust means you’ll have to pay tax, another lot of stamp duty and perhaps CGT as well.
My friend, you need to get yourself off to talk to a good adviser before you do another thing – it could save you thousands (if not hundreds of thousands).
It’s very important that you know what your exit strategy is with your developments before you start (sounds like you’ve got it planned) and then get advice as to the right entities that will allow you to do it without incurring unnecessary taxes duties etc.
Sounds like you’re on the right track – just need to get the details in order.
Good luck with it all.
Megan
http/:www.propertyhub.netSorry Kay, I don’t agree with you.
If you sell a property (esp. one for around $1.3M) you lose whatever it costs you dispose of it as unrecoverable expenses i.e. money down the drain.
Even though you might replace it with another well-yielding property, the $$ it cost to sell you is money gone – whichever way you look at it -as it the stamp duty on the new one.
As well, a higher price property will appreciate more (in most cases) than two lower valued ones esp. if the lower valued ones high good yields. Remember yield is usually a trade off of capital growth. You rarely get both high yield and high capital growth (I know it does happen occasionally but is as rare as hen’s teeth).
Megan
Pinnie
TMA makes a good point in relation to deductibility of interest however, if you are planning to hold the property long term, or if your (or your partner’s) circumstances change this could come back to bite you.
For example, if the highest income earner retires or stops work for another reason, the losses (and deductibility) are in the name of someone with no income to claim against. And, you can’t transfer the property to someone else unless you want to bite the bullet on a second lot of stamp duty and, possibly, CGT.
I’d get some professional advice about structuring before you do anything and make sure your advisor takes into consideration ALL taxes that might affect you i.e. income tax, land tax, CGT and stamp duty.
Certain Trusts can give you benefits that cover all areas but seek the right advice before you sign anything.
Regards
Megan
Don’t know that I agree with Terryw’s opinion. You don’t need to sell to get the profit out. If you do, yes, you get the cash but you also deplete the profit by the tax.
If you don’t sell but hold the development and unlock the increased equity through borrowing against it, you don’t lose the tax and still have an appreciating asset.
Yes, it’s true that the interest on the borrowings to pay of your home loan is not tax deductible – Terry is right, it’s the PURPOSE of the loan that determines its tax deductibility – it might be a whole lot less than paying the tax on the profits of the development site.
I’m a developer and try to hold as much of a development site (the profit anyway) in units/houses because I’m not prepared to lose 30%+ of it in tax. I’m more than happy to pay 7% interest. Plus, with a good accountant, there are other ways to legally and legitimately minimise the non-deductible interest.
Hope this helps.
Megan
http//:www.propertyhub.net
Here are my thoughts – for what they’re worth.
Firstly – I try to never sell for a couple of reasons. Every time you sell you deplete your asset base by
1. The costs of the sale (i.e. agent’s commissions, legals, etc)
2. The stamp duty to buy back into the market.
3. Any CGT or other taxes.Currently, from what I can gather, you have an asset worth $1,300,000. If you sell it and buy two more (for $400 and $600) you’ll not only lose $39K in agent’s fees (assuming 3% commission) but also $35K odd in stamp duty (depending on the state you live in. Then add whatever, if any, tax consequences there are. You might also want to add legals and establishments costs on 2 new loans.
That’s a depletion of assets by at least $75k+ because of an annual loss of $4300!!! (I’d also guess that in 10 year’s time it would probably be neutral or even positive due to rent increases.)
Then there’s the capital growth “loss”. Higher prices properties typically benefit from higher capital growth than lower ones. Remembering that property doubles every ten or so years (it has for the last 100!) then if you replaced the $1.3M one with 2 @ $400K and $600K, in ten years you’ll have assets of $2M rather than assets of $2.6M (that’s another $600K disadvantage.)
What I’d suggest is you borrow against the equity in the $1.3M and buy a cashflow +ve one to offset against the negative one – thus “neturalising” the cashflow effect.
I personally wouldn’t deplete my assets to the tune of $674K because of a $4300 annual loss. Even if you capitalise the loss annually against the loan i.e. add it to the loan balance, you’ll still be ahead by over $600K in ten years time.
I note that you say that one of your reasons is “minimal effect on investment”. I heartily disagree for the reasons above.
Anything I’ve ever heard or read from succcessful investors says “never sell” (unless, of course, there are pressing circumstances). In your circumstances, with so much equity, I would be looking to invest more not downscale.
Hope this helps!
Megan
Ed Chan from Chan & Naylor in Sydney is awesome. He’s a developer and investor himself and what he doesn’t know about property, developing and structuring you could write on a pinhead. He’s also a huge forward thinker.
I never make a move without him.
Fiona
What a fabulous topic!
Unfortunately, we’re all surrounded by people who want to bring us down (ah, yes, the tall poppy syndrome is very alive and well in Australia!)
A couple of years ago, I heard Dolf de Roos say that a person’s income is typically the average of their 5 best friend’s (try it – it’s amazingly true). If you want to raise your income – get different – and wealthier – friends!!!
I’m not trying to be facetious or put people down, however it you mix with successful people you pick up their ideas, learn more, get exposed to their networks (remember, your network equals your net worth), and, best of all, adopt their can-do attitudes. They’re uplifting and fun to be around. I had to put some space between myself and friends in the past, not because I wanted to but because I can’t afford to let their negativity bring me down.
We all have friends – and even family – who want to bring us down. Unfortunately the truth is that the sole reason is jealously. There are some we can put some distance between, there are others we can’t or don’t want to. (I have a family member who tried to poo-poo everything – I’ve jut decided to avoid any conversations that lead in that direction.)
I agree with most – don’t hide what you do. I recently read a quote by Gordon Green (a successful investor) who said “Every Australian owes it to themselves, ther family and their fellow Australians to become as wealthy as they possibly can. Only the rich can contribute and assist the poor” How true! In a crisis (e.g. tsunami) it’s the rich who dig deep to help. Same with you family, if someone need urgent help, your being poor isn’t going to do anyone any favours.
Next time some short-sighted person makes a stupid comment – something like “it allows me to contribute to charity and really help others less fortunate” usually shuts them up!
Thanks for starting this interesting post.
Megan
http//:www.propertyhub.net
I agree with most of the people here. I had a friend that did what you’re proposing – kept renting and acquired her first property. She’s now up to no. 3 and has her own place as well – but didn’t buy it until after no. 2. The first was cashflow neutral for the first year but then positive. She found that her rent was much cheaper then a mortgage would be, thus giving her cashflow to put into investments.
She’s 50 years old and, never thought she’d own her own home. Just 3 years on, she’s benefitted from the capital growth, she now has 4 Including her own home) and is as happy as a pig in mud. She agrees that she probably wouldn’t have been able to do this had she bought her own place first.
Good luck!
Megan
Hi
I agree. An Option is probably the best way to go in the circumstances. Good luck with the subdivision. Sounds like it will be lucrative for you.
If you are keen to hold the properties, could you look at releasing some of the equity to fund the negative cashflow. I’m doing it with one of mine and it sure beats selling them as we all know that every time we do we both deplete our assets as well as forego capital appreciation. You might want to consider this, esp. if they are in an area where the long term capital growth is healthy.
I’ve just done this with a property with my bank. They did two vals – one un-subdivided and one subdivided and are lending on the equity of the subdivided lots.
Hope this helps with your thought processes. Can’t help with the lawn mowing however!!!
Megan
I’m not sure that you should be scared of debt as such, remember that property traditionally doubles (as proven over 100 years) every 10 years so you can either live from equity increases as the property increases in value or sell it to live off. I’m fairly adverse to selling real estate only because the sale of a property depletes my assets by at the least the cost of the agent’s commissions and sales expenses every time.
Your problem seems to be a cashflow one and there a few ways to skin this cat.
In relation to some advice, I agree that you should sit down with a professional although a “licensed financial planner” in my experience is simply a commissioned agent for a number (or worse one) managed funds provider.
My suggestion would be to sit down with a very good accountant – one who knows about property and has EXPERIENCE in this area. Don’t take advise from anyone who hasn’t done what you want to do.
I have an exceptional accountant who is a property investor and developer himself and who lays is all out in relation to my personal situation every time I make an investment decision. We look at how exactly this is going to impact me and how it fits into my future plan. What a find! (Happy to give you his name if you are in Sydney).
Don’t make any hasty decisions. Get good advice, put in place a plan and stick to it!
Hope this helps.
Cheers
Megan
[email protected]
http://www.propertyhub.netHI
Tuggernong Valley is up and coming and Canberra is predicted to be one of the best growth areas over the coming years. Try Conder (in the south) or Gordon – still some good priced properties.
I do a fair bit of business in Canberra in the property market. If you let me know what you’re looking for, I can perhaps steer you in the right direction and to some good agents.
Cheers
There are organisations that specialise in development finance (look in the weekend papers for some). Banks are notorious for giving the worst kind, some of the “specialists” in this area know what it’s all about so will give you loan with staged drawdowns and allow you to capitalise the interest and repay the lot when the project is sold at the end. You will however need to prove to them that you know what you’re doing and have accurate feasibilities done to show all of the costs, the projected sales and timing of construction costs. All will need to be based in reality as they will do their own valuations on the construction costs and sales prices to prove it’s a good deal before they lend the money.
Developing is a lot of work, but really rewarding if you know what you’re doing and do it properly. Good luck!
