We currently have a 4 unit site in Mandurah – 45 minutes south of Perth CBD. My husband purchased it 1999 for 85K. It is now worth over 300K. It has a 50 year old house on that we have been using as our principal place of residence.
We have just purchased a new house for ourselves which will settle mid November. We estimate that we could build 4 units/townhouses for 600K. My husband is a registered builder although has not worked on the tools for many years.
Given that we could sell the townhouses for 250K each minus our 600K to build, we could walk away with 400K. However, we would then be hit with capital gains tax.
If we sell the old house as is for 300K we make over 200K with no CGT to pay. The current house is totally in my hubbies name and he has no significant income, therfore I am assuming that CGT would be minimal. I am in the top tax bracket but my name is not on the title or the mortgage.
We can not afford to develop and keep the four units. We could maybe sell off two and keep the other two. We have a real estate portfolio at present valued at 1.5 mill minus debt of 900K. All properties are cash flow positive and all in areas where they will appreciate.
Comments please.
The best scenario is dependent on the location/market and where it is heading in the next couple of years – and how much risk you want to incur.
If there is clear projected growth in the next 3-5 years, then I recommend building the units and retaining one or two.
If the project is feasible I wouldn’t decide not to move forward with a development because of CGT alone.
You should also speak with a qualified accountant about tax implications, if you have not done so already.
— Michael
Hi Fibejebe
Sale proceed $1mil (less GST?)
Less costs of Land $300 + Build $600 (Less GST?)
Gives a profit of $100K ie 10% ROIThe ROI % looks kind of skinny to me. Should work on 20% to 25% for the development risk.
You didn’t mention if you have non deductible debt on your new PPR. If you do, maybe sell your old PPR within the ATO timeframe allowed (to not trigger CGT)and paydown new PPR debt.
Regards
Tony
Tony – I think the $600k includes the $99k paid for the land.
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
Thanks for the suggestions. We spoke to the accountant this arvo. If we rent the place (until we are ready to develop) we would get a return of $120 to $130 per week on a $300K property. Not a good return.
Therefore, it seems to make sense to sell, pay some off the new PPOR – need to keep some mortgage on that as I am salary packaging and it helps to drop me down a tax level – and maybe buy a cheaper unit as an investment or pay off more debt so that we are one step closer to being self funded retirees.
Thanks for taking the time to reply.
Run a couple of scenarios past the bean counter.
If you flog it off now, you will pay no tax on any profit, at all, because it is your ppor.
But, if you develop it, you may still be up for some tax (albeit you will get the 50% reduction)
Also, dont forget gst on the units, and the possibility of a downturn in the market.
Personally, I would go off to council, find out regulations re setbacks, floor space ratios, etc, then get an architect/draftsman to draw up some plans, then pass them through council, and then probably sell (with the da in place), while living in it, to avoid paying any tax.
Just my 2c worth
Someone emailed me suggesting we do a vendor finance arrangement where a developer pays 120K (or something) upfront and then gives us a unit on completion. Looking reaalistically at the figures, you can build a single story unit for 100K each. Therefore cost to developer = 400K (4x100K per unit), 120K upfront, 30K incidentals = $550 all up. He gets 3 units, sells them for 250K each and makes 200K profit. Is that the deal? Are my figures reasonably accurate? Where do you find a developer?
Just a few things to consider with this deal… I am doing a virtually identical development in Mandurah and the cheapest villa you could build would be closer to $110k to construct (i.e. approx 95sqm with a single garage). Then there will be stamp duty, interest, consultants, landscaping, GST on the profit, selling fees etc. Mandurah Council are a dream to deal with though.
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
You must be logged in to reply to this topic. If you don't have an account, you can register here.
