G’day All
Needs some help with Capital Gains Tax issues and a hold or sell question?
I purchased an old house, which I demolished and then developed two houses on the land. Initial cost for the house/land $210000 + $30000 for demolishing, clearing and some extras. Build two houses for $255000. Property value after one year is approximately $340000 per house. I owe the bank a total of $370000. I have the one option/idea to put some further cash into the properties and make them CF neutral or slightly positive, I would need use about $20000 of my cash funds to do that. They rent at $270 a week each.
The other option is to sell one and pay out most of the mortgage leaving me with a debt of approximately 30-40K and one property CF + to the tune of approximately $230 a week.
My questions are:
1. If I sell one property what is my Capital Gains Tax going to be?
2. I’m I financially better of in keeping both and using some personal cash to make them CF neutral or slightly positive or,
3. I’m I better of to sell one and have more cash in the hand?I think that selling is the best option but I may have missed something…like CGT!
Any financial gurus out there that can point me in the right direction??
I am not familiar with developments but somewhere in my head a rememberance from a workshop I attended is surfacing.
If you sell a new property within 5yrs you could or will have to pay GST. Does any experts know the proper rule and details of this?
If you want to get out of a hole, first stop digging.
Micasa / Brenda
If you sell ANY INVESTMENT you will be liable for CGT.
If you sell under 12 months you pay 100% CGT, if over 12 months there is a discount of 50% for CGT.
If it is a PPOR then it is CGT exempt.
So if you move into a property (claiming it as your PPOR) then decide to rent it out for a while, you have 6 years in which you can do this and still be CGT exempt PROVIDED you do not claim another place as your PPOR at the same time.
Micasa, re whether you should hold or sell; that’s up to you. Remember, CGT is calculated on the profit made between the cost base (what you paid for the property + associated costs ie. stamp duty, legals, building etc) and the actual price you sold it for.
In your case:
210,000 + 30,000 + 255,000 = 495,000
If you sell both at 340,000 each (as stated)
680,000 – 495,000 = 185,000 profit (less 50% held for 12mnths)
You pay CGT on 92,500This figure is then added to your yearly income, and you are then taxed according to the normal scaling system.
NB: These figures do not take into consideration things like commission to REA for selling, legals etc which is calculated as part of the cost base.
If you sell one, then you need to split the cost base and profit figures above accordingly.
Hope this helps,
Jo
Originally posted by Micasa:
I purchased an old house, which I demolished and then developed two houses on the land. Initial cost for the house/land $210000 + $30000 for demolishing, clearing and some extras. Build two houses for $255000. Property value after one year is approximately $340000 per house. I owe the bank a total of $370000.CGT issue has been covered in Jo’s post but as Brenda said it would pay to check for any GST liabilities you may or may not have.
Your GST status has an impact on this aspect of your development. A search of the ATO website would be a good place to start.
I have the one option/idea to put some further cash into the properties and make them CF neutral or slightly positive, I would need use about $20000 of my cash funds to do that.
Set up your cash reserves in an offset account so that you do reduce your monthly interest bill and yet retain ready access to your cash.
This way you get to retain the properties and reduce your outgoings. Much better option in my book.
Any financial gurus out there that can point me in the right direction??
Not a financial guru
Derek
[email protected]Property investment advice and researched property in quality locations available.
You can avoid CGT altogether (if your living situation allows) by calling one of the houses your PPOR & selling it – quickly I imagine. Then you can move into the other house and call that your PPOR and sell it with no CGT either. But you may have to do this over a period of time & you should definitely talk to your tax adviser before doing it.
Also, if you build a house to sell but then rent it instead, it does have GST implications. If you have already claimed GST on building costs, the tax office could ask for these back and while you can still claim this down the track, it will be delayed by at least 12-18months. (A lot of people have been caught out recently with this one because they claimed the GST for building cost etc and then spent that money on extra renovations – so they didnt have it when the tax office asked for it back).
Thanks for the replies. From your comments I realize that, CGT sucks![angry2] and it looks like I’m in a better position by holding on to both properties.
Thanks again.
Originally posted by JasonBourne:You can avoid CGT altogether (if your living situation allows) by calling one of the houses your PPOR & selling it – quickly I imagine. Then you can move into the other house and call that your PPOR and sell it with no CGT either. But you may have to do this over a period of time & you should definitely talk to your tax adviser before doing it.
Hi Jason,
One of the stipulations in the CGT guide is that you can largely only have one PPOR at anyone time.
Your ‘solution’ would see Micasa still liable for CGT, albeit it would be apportioned over the length of time owner/length of time as an IP.
Derek
[email protected]Property investment advice and researched property in quality locations available.
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