This sounds like a riddle but here you go…
I’ve approached the owner of a potential dvlpmt site. The one owner owns two sites next to each other. One they live in and bought pre-1985 (and pre CGT) and the one next door they bought in 1988 and are renting out.One of the concerns expressed by the owners was the CGT they would face if they were to sell the 1988 rental and they believed they’d be better of passing it to their kids when they died just to avoid it. I’ve been racking my novice brain and these numbers are just simplified but could the following arrangement address their concerns while favouring a feasible deal if for example,
both sites were worth $500,000 but I gave them $700,000 on settlement for the pre-1985 house, and they vendor financed the 1988 rental, then upon completion gave them a completed townhouse worth $400,000 and a % of profits, would that avoid any capital gains tax?
1. Would they then have to declare the cash profit as income and be taxed at their marginal tax rate?
2. And if they sold the completed townhouse, what sort of tax would they face on the sale if any?
3. Is there anyway, that transferring their PPOR to the rental would help out seeing as the one they live in is exempt?Any ideas would greatly relax my brain space on this one and be very very appreciated.
Thank you in advance
How are you going to develop it if they still have the title?
Anyway, I think starting construction on the property will remove the CGT exemption by shifting the cost base to current value.
Paying them too much for the other house they will still be assessed at market rates for CGT and Stamp Duty purposes.
If they moved into the rental now then it could be exempt from further CGT – but unless they lived in it in the last 6 years it woudn:t be exempt for any CG up until now.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I'll answer the last one first – no. There would be some CGT on the rental, even if they moved in.
If the contract for the pre-85 house was for $700,000, then that should be ok as it will be free of CGT.
The issue i see is that they will still have the title for the rental, and will have to pay some CGT or income tax (depending on intent) on the sale of the townhouses. There will have to be a transfer either to you or end purchaseer at some stage, and this will trigger a tax event.
The simplest way (for them) to minimise CGT is for them to be living in the 1988 house as their PPOR when they die, then the children have 2 years to sell it without incurring any CGT.
Your solution needs expert advice
crj wrote:The simplest way (for them) to minimise CGT is for them to be living in the 1988 house as their PPOR when they die, then the children have 2 years to sell it without incurring any CGT.
Your solution needs expert advice
How does that help if they want to subdivide and sell townhouses for profit?
A post mortum sub division?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I’ve been processing your comments throughout the day. Thank you all for your input.
The situation has now become a little simpler now as I’m now only considering making an offer on one of the properties (the 1988 rental).
I do need to do some more research into the technicalities of vendor financing for a development.1. So capital gains tax is payable and calculated when the title is transferred? And that wouldn’t usually be at settlement when you hand over the inital cash outlay when doing 50% vendor finance for a development? Or is that more like a joint venture and is that totally different?
2. Is Capital Gains Tax calculated at the market value or at the ACTUAL capital gain (sale price less cost base)?
For example, if I gave them an initial cash outlay equivilent to the cost base and then gave them 2 of the 8 units upon completion which they kept and rented out. Would that avoid CGT & marginal tax all together?Be assured I will get professional advice before I do anything, but I appreciate you all sharing your knowledge…
What do you mean by vendor finance?
If you are talking about only giving the owner part of the amount upfront and the rest later then this is essentially the vendor lending you money. Your purchase price will be the full amount agreed upon. Title will transfer at settlement and the vendor will be liable for CGT then in the tax return for that financial year.
If you are giving them cash and units then I think it CGT will be based on market value of the cash and hte units together. Title will change from them to you and then partially back to them again, stamp duty too. There is a way around this possibly, but it won:t work if a loan will be needed – unless you can get them to guarantee your loan.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry,
I’ve done some more research and I think I understand the issues you and Dan have pointed out and why my brilliant and cunning plan is absolutely flawed…(why I thought I could out-smart the powers that be on something I know nothing about, I don’t know…lol).Anyway, so CGT is calculated as per the sale price in the contract of sale, from the date of the contract is that right?
And is settlement the date I pay out the remaining balance of the purchase price or the date that I give the owner part of the amount upfront?
And it would be no use putting a lower price in the contract of sale if I need them to vendor finance half of it because I would need to show the equity being vendor financed to the banks when I apply for the loan? (And I would need that full 50% of the equity to be vendor financed to make it feasible). And I guess the banks would want to see what the vendor was getting out of it as far as a unit on completion, but does the ATO?Can we make a separate legal agreement to tie in a unit as part of an arrangement that the bank can be privy to, but that isn’t part of the contract of sale if the vendor understandably wants something in writing?
Are there any clever tricks or tweaks that I’m missing?
Firstly, there is a section in the tax act which says that transfers under market value are assessed at market value for CGT. Same with Stamp duty. So ddrawing up a low price contract won:t really help.
But you can still do things such as vendor finance. eg it is worth $500,000 but you pay $250,000 on settlement and giving the owner one unit valued at $300,000 when you complete construction. Title would chance to your name on settlement. This is easy in theory, but hard in practice as the banks may not like it with you not putting any of your hard earned cash into the deal and the seller will also want a mortgage to protect his interests.
For the vendor I think CGT would apply on the $250k and the value of the unit. Bt I am not sure how it could be applied as there may be a year or two between him receiving the unit and the cash.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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