Hi everyone,
I have just started my first development and it looks like i am going to make a fairly healthy profit at the end, so i am wondering how i can avoid CGT when i go to sell? I have subdivided a block and now i am building two houses. My original plan was to live in one after completion for the required period to claim it as my ppor then sell and move into the next one to live in. Then someone told me that because i have done this development for investment purposes only i can never claim the CGT discount for being my PPOR? I don't know if this is true but if anyone else has been in this situation and could give me a few ideas on how to get around this or any other ideas on avoiding CGT it would be great!
Thanks for your time,
Cam
Hi Cam,
This will certainly require a visit to the accountant, but in a very similar scenario, my accountant advised us that if the intent is to sell and make a profit, then you are not eligible for the PPOR exemption even if you live in it for a period of time, so I suggest you find everything that would indicate your intention to stay in a while. Although, it sounds like you now dont intend to live in it, so it may prove fruitless.
I have heard of reinvesting in trees to defer/avoid paying CGT but my understanding is it still is not in your pocket.
Goodluck and if you find a solution that doesnt involve guest accomodation in the big house, please share.
Cheers tammy
You will be unable to avoid CGT and possibly GST.
I assume that you were careful in choosing the name in which you undertook the project i.e Discretionary Family Trust or in the name of the lower marginal tax rate payer.
All you can do is defer the tax payable by staggering the contract dates but will not avoid paying it.
Richard Taylor | Australia's leading private lender
So your saying by staggering the contracts, as in selling one and keeping the other therefore no profit has been made on the project until the second is sold?
I just read my loan contract and it reads "purpose of loan: To help with construction of investment property". Is there anyway that an investment property can eventually become your PPOR?
Yes Cam, you turn an IP into a PPOR by living in it. CGT is still payable upon the proportion that it was used as an IP eg 2 years of say a five year ownership (living in it for 3 years as your PPOR) – and you may get the benefit of the reduction in cgt.
Cam
No it doesnt work like that.
Costs will be apportioned between the 2 properties and Tax will be payable on the profit (difference between the end sale price less costs of construction etc of that unit).
All that will happen is that by staggering the sales you can control when the CGT is payable i.e into the new Tax year by signing a contract 1st July instead of 30th June.
Richard Taylor | Australia's leading private lender
And don't forget if you are developing with the intent to sell the profit will probably be just income, and not capital gains. That means there will not be any CGT discount. Having to pay income tax of the profit could be perferable depending on your situation. have a look at the booklets at http://www.bantacs.com.au – there are some on property developing.
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
Hi, if you sell immediately or off plan, all profits are 'trade profits' on which you pay normal tax. Then you have to pay GST as well 10% minus what you paid out to others in the process of building. On a $300000 house, you roughly pay $13000 GST. [approximate only]
If you keep the houses for more than 1 year, you probably pay CGT (50% OF PROFIT) and you still have to pay GST.
GST doesn't apply after 5 years. So another option (probably the best) is to keep them as rentals for 5 years before selling. You can claim expenses, and depreciation generally wipe out any tax for 5 years. At the end of the period, the cumulative -ve gearing + depreciation usually mean you keep much more of the profit. You might also be lucky & get 5 years' growth on top of all that.
My experience is the longer we hold, the more the profit but reality is usually we have to sell for cashflow. I just sold 2 & pay tax as described. Trying to minimise with super strategies.
Good luck,
KYOne thing KY, if you hold for five years, you have paid the gst when you built. As the properties are residential you can't pass that cost onto the purchaser it is included in your price. You don't get it back.
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