All Topics / Legal & Accounting / Tax for Capital Gains on a Property I do not own

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  • Profile photo of streamlineinvestingstreamlineinvesting
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    @streamlineinvesting
    Join Date: 2010
    Post Count: 171

    I have a question I am a bit curious about, recently a bit of an opportunity to potentially make some money, but before I commit any funds to it I just need an answer.

    Basically my grandmother is looking to sell her place, she no longer lives there as she needs full time care and she does not want to have to worry about the property. It is a very nice property in a desirable area of Sydney. However it could do with some renovations to improve it significantly, at the moment I can just imagine anyone looking to buy the house would be scared off by how much work needs to be done, but the structure of the building is solid so it is not really worth knocking down and starting again.

    The plan I came up with and that she has agreed to is to get the house valued as it stands now and get a price we would both agree on (say $1.5 million) and then I spend my own money to renovate the property as much as I wanted to and then when we do come to sell the property (say it goes for $1.7 million), she gets the $1.5m and I get to keep the $200k above that. My question is do I get taxed on that $200,000? Do I have to declare that as income when I do my tax return? 

    I just want to make sure I do all the sums before I do commit to anything to see if it will really be worth it at the end of the day.

    Any help or advice would be greatly appreciated.

    Profile photo of wilko1wilko1
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    @wilko1
    Join Date: 2010
    Post Count: 510

    Your grandmother should be entitled to the Capital Gains Tax exemption for her Principle place of residence. A better method would be … Say your renovation budget is for example 100k.

    For you to lend that money to your grandmother at normal lending rates, have your grandma do the renovations (you could organise it but all receipts in your grandmas name)

    Then when she sells the property she repays you the money. She wouldn't pay any CGT on her own home. She could then gift you the other money. Not sure what the limits are on gifting. But certain gifts to different trusts can take larger amounts then the individual.

    Good to check over the gifting with a accountant.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Agree with Wilko however you will also have to carefully consider the implications for your grandmother when it comes to pension and also nursing home funding matters.

    Ensure she gets proper advice before doing anything.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Yes, you would be taxed as you are doing this with a profit in mind. You could possibly help your grandmother though and she could gift to you.

    However, there are many complex legal issues such as:

    1. Capacity – does grandma have legal capacity? Could there be allegations of elder abuse involving undue influence etc. Often this will come from other family members

    2. Losing capacity. She you do set up all up now and then grandma loses capacity. Has she appointed an enduring attorney? What will this person think? If it is you does the deed allow the attorney to make gifts to themselves?

    3. Death. What if grandma dies? Who is the executor of the estate? Will they honor the agreement?

    4. Death – what if you die? You have tied up your cash, can your estate get this back?

    5. Gifting – pensions would be affected

    CGT may or may not apply. Don't assume because it was a main residence that it won't apply for grandma.

    Wilko, don't know what you mean when you write: "But certain gifts to different trusts can take larger amounts then the individual." But it is incorrect.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of wilko1wilko1
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    @wilko1
    Join Date: 2010
    Post Count: 510

    I thought the was limits to how much you can gift a spouse or a relative etc

    my other comment was the thought of setting up a testamentary trust for the grandson/son. 

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213
    wilko1 wrote:
    I thought the was limits to how much you can gift a spouse or a relative etc

    my other comment was the thought of setting up a testamentary trust for the grandson/son. 

    There are no restrictions on who or what or how much you can gift to anyone. However there are a variety of consequences.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of wilko1wilko1
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    @wilko1
    Join Date: 2010
    Post Count: 510

    Thanks for that terry. 

    You have proberly answered this in another post. But what formal qualifications have you done to gather the taxation, estate planning and other legal/property related advice over the course of your career. 

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213
    wilko1 wrote:
    Thanks for that terry. 

    You have proberly answered this in another post. But what formal qualifications have you done to gather the taxation, estate planning and other legal/property related advice over the course of your career. 

    Many courses I am afraid – Bachelor of law, Grad Dip legal practice, Master of law, dip financial planning, etc

    And hundreds of short courses.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of streamlineinvestingstreamlineinvesting
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    @streamlineinvesting
    Join Date: 2010
    Post Count: 171

    Thanks Terry, looks like I will have to talk with someone directly about the situation to make sure it does get done correctly. As for grandma's capacity, she is of sound mind at the moment at least. I know what you mean about pressure from other family members and that was a big concern, especially since she has 8 children who will all have their own ideas of what should be carried out. I made sure I talked to all of them about this before we got too far and they were happy enough for the works to be carried out, all they are looking out for is what is best for grandma, and they realise now that we are looking out for her best interests as well.

    Do you have any contacts you can recommend to help us out with all this? Setting it all up so it works best for everyone. We are based in Sydney so that would be preferable.

    Profile photo of petefromsydneypetefromsydney
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    @petefromsydney
    Join Date: 2010
    Post Count: 10

    Why not engage Terry? If I were in your position I will.

    Profile photo of Ryan McLeanRyan McLean
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    @ryan-mclean
    Join Date: 2010
    Post Count: 547
    streamlineinvesting wrote:
    I know what you mean about pressure from other family members and that was a big concern, especially since she has 8 children who will all have their own ideas of what should be carried out. I made sure I talked to all of them about this before we got too far and they were happy enough for the works to be carried out, all they are looking out for is what is best for grandma, and they realise now that we are looking out for her best interests as well.

    Be VERY careful. I have seen families fall apart of inheritance money. Just because they said OK today doesn't mean they will be ok with it if the market shoots upwards and you end up pocketing a lazy $300K or something. They will get jealous and some may want some of that pie.

    When you say "looking out for what is best for grandma" – If the property is already worth $1.5 mil and you could sell it for that and that is all she will get…what is the benefit to her of you doing it up?

    Sure it might take a little bit longer to sell, but if youre spending time doing renos it might take longer to sell anyway.

    Truthfully it sounds like you want to snap up this opportunity for yourself, not so you can help out grandma. Apologies if this is incorrect, but better to hear these arguments from some forum member than a family members with lawyers :)

    Ryan McLean | On Property
    http://onproperty.com.au
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    Profile photo of streamlineinvestingstreamlineinvesting
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    @streamlineinvesting
    Join Date: 2010
    Post Count: 171

    You are definitely right, there is an opportunity here to make some money and I am looking to take advantage of that. Someone has to make the money so may as well keep it in the family if possible?

    As for taking longer to sell due to renovations, she wants to sell the property around March next year, and I am looking to have the renovations completed before then so it should not make much difference in terms of her getting money. Also this way she is guaranteed a price that she has agreed upon before we do anything. If she is not happy with the amount then we simply won't carry out the renovations and we can let the market decide the value. 

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