"Sell and build" or "borrow and build"

Viewing 6 posts - 1 through 6 (of 6 total)

tamachan
Member
@tamachan
Join Date: 2009
Post Count: 2
June 12, 2009 - 3:01 am
Hi,
I currently live in the house I bought 2 years ago.
2 years ago, I also bought a vacant land near here, and I have been designing a house to built.
Now it is almost ready to start building the house on the land, however I do not have enough money to cover the building cost.
I am wondering if it is best to;
1) Sell current house and use the money to built the new house
2) Mortgage money to built the new house and use current house as a inventment property
If I go with 1), I may benefit from capital gain tax as I have been living in this house all the time. However the market now is not very good and may gain more by keeping it and renting it… as I do not have any financial issues on mortgaging.
For 2), I am wondering if I can morgage for the current house I live in and use the fund to built the new house,,, as this way, I can offset the rental income vs mortgage cost. But if I can not do that, I will be fully taxed on the investment property… if this is the case, is it best to sell the current house and built the new house, and then mortgage to buy a new investment property.
I should ask for a leagl advise,,, but who should I talk to? Accountant or solicitor?
Thanks for your help,
Tamachan
Scott No Mates
Participant
@scott-no-mates
Join Date: 2005
Post Count: 3,856
June 12, 2009 - 3:38 am
Do you intend to live in the house that you want to build? If so, any borrowings that you make for it are not deductible.
kum yin lau
Member
@kum-yin-lau
Join Date: 2006
Post Count: 342
June 13, 2009 - 6:38 am
hi, you probably can get a construction loan. Since you own the land already, it should be easy. 70% of end value, say $320000, you can borrow $224000, should be enough to build 3BR home + finishing. You might even get higher than 70% LVR or your end value may be higher than $320000.
The entire loan will be tax deductible if you use the new house as an IP. You can also claim the GST paid.
Continuing to live in the old house for 5 years may have a lot of financial benefit, as opposed to living in the new house.
You have to do your own sums to see what works best. Good luck,
KY
tamachan
Member
@tamachan
Join Date: 2009
Post Count: 2
June 13, 2009 - 10:17 am
Thank you very much for your advise, Scott and Kum !
I see,,, the mortgage has to be a Investment Property to be tax deductable at the time of start.
But,,, Why living in the old house for 5 years may have more financial benefit? any difference on capital gain tax? Thanks,
Tamachan
Scott No Mates
Participant
@scott-no-mates
Join Date: 2005
Post Count: 3,856
June 13, 2009 - 10:24 am
Living in the old house means that you can claim the depreciation on the newly constructed investment property (if a QS has given you a schedule, then you will be able to claim more than just the 2.5% pa of the construction costs). Mind you, when you come to sell, you have to add back the depreciation to determine the capital gain.
kum yin lau
Member
@kum-yin-lau
Join Date: 2006
Post Count: 342
June 14, 2009 - 5:13 am
Hi, after 5 years, there's no GST on sale. If you sell the new house upon completion, you may cop trade profit as well instead of CGT which is 50% of total gain. Eg, if sale price is $380000, then GST is 10%. If you use the margin method of calculating GST, you'll still have to pay a substantial amount.
When you tote up everything, you may find that you have an IP which is CF+ but -ve gearing.
If you do decide to sell the new house immediately, make sure that the contract specifies the margin method of computation of GST.
You can do the depreciation schedule yourself if you keep all records of costs. I did mine like that and my accountant charged me the usual not very high rate of doing my tax return.
KY