Adding value to a PPOR and then selling

[Blacky]

So - lets you have owned your ppor for say 10years and have always lived in it (ie - its never been a rental), and are ready to move on - any sale proceeds are tax free.

In order to maximize the sale price you want to do a bit of 'sprucing up'. You run out and replace flooring, throw in a new bathroom, splash some paint around the place and re-do the kitchen.

Before improvements the house was worth $500k.
You spend $50k doing it up and sell it for $750k.

My understanding of this would be that the $50k is a non-deductible expense and you land $750k tax free.

Effectively you have generated an additional $200k tax free.

Is this correct?

What happens if you decide not to improve anything, but rather seek approval to do something. Ie the block has development potential, however, you don't have the resources to develop. You can however, get designs completed and sell the house - with council approved plans - for a premium to what the house (without the approved plans) is worth.

Ie the house is worth $500k.
You spend $50k getting designs/council approval
And sell for $750k.

Whats the tax treatment?

Blacky

 

[Paul@PFI]

Blacky

If its your home all costs are non-deductible. If its a exempt CGT issue then the DA costs can be ignored too. They are exempt costs. Many people seek a DA for their home while they live in it. A DA isn't a development. Its just an application. Many DA's are never actioned. Even someone else can apply for the DA too....Developers do this all the time. They offer to buy conditional on a DA and your support for the application. Then you sell with DA and yes get more. No CGT issues generally (Always check) Yes its generally tax free. Its too early to be considered a enterprise and the DA isn't a CGT issue. It is ignored. There are catches......Typical one is a LONG dated deal with a developer. Property may rise in value and become taxable.

The danger is if you cease living there or make it unliveable. Or you start actual DA works (ie sewer, power). Then you are conducting an enterprise and the land may lose main residence status, become trading stock under CGT rules (using either cost or market value) AND may be subject to 1/11th GST when sold since its a taxable supply by an enterprise.

In your example likely tax is $0...But always get personal tax advice. BTW you don't want to apply for DA with a design. Buyers might not want it and its not worth cost. You can apply for lots and indicate M2 and council will assess based on that. Town planners etc can advise and draw it up and handle council if needed. They know what will be approved and wont. They also know what to try to get approved and see what happens. You just have to ensure that land USE / area / boundary etc meets buyer needs. I have seen many DA sites for three lots become four when buyer acquires.

 

[SamL]

So to jump on your thread Blacky, what if the scenario was something along the lines below?

Scenario:
PPOR purchased for $600k
Rennovation $100k
Subdivision $100k
Construction of 2 dwellings $650k

Total costs: $1,450k

Sell 2 dwellings: $1,200k
Retain PPOR valued: $750k

Remaining mortgage: $250k
LVR: 33%

So in the above scenario what is the tax situation? Would I be liable for GST selling the 2 new dwellings? CGT? On paper it would appear no actual 'profit' has been made but I am unclear to as how this works regarding subdivision of a PPOR.

 

[Paul@PFI]

So to jump on your thread Blacky, what if the scenario was something along the lines below?

Scenario:
PPOR purchased for $600k
Rennovation $100k
Subdivision $100k
Construction of 2 dwellings $650k

Total costs: $1,450k

Sell 2 dwellings: $1,200k
Retain PPOR valued: $750k

Remaining mortgage: $250k
LVR: 33%

So in the above scenario what is the tax situation? Would I be liable for GST selling the 2 new dwellings? CGT? On paper it would appear no actual 'profit' has been made but I am unclear to as how this works regarding subdivision of a PPOR.

No CGT as intention is to build for profit. No question. Ordinary income tax applies to the profit !! GST certainly applies to both sales. Issue of apportioning the original PPOR cost for the subdivided land etc arise. How would PPOR be valued higher when 2/3rd of land has been consumed ?

In many cases Council wont allow DA either. You cant reside on a building site due to hazards, access etc. The home could lose main residence exemption if not careful.

 

[SamL]

Ok, thanks for the start Paul, just getting my head around all this, maybe a little more info. I have been looking at an older style period weatherboard home. It is on a largish block. Has street access on three sides.

Would renovate first and move in to existing house then do the subdivision. So are you saying you couldn't live in that house whilst two other houses are built on the land? Why do you think a DA would not be approved on that basis? Also not sure how would lose the main residence exemption? We would still be renting whilst renovating to make the house how we want it before moving in.

If subdividing it would be 2 new townhouses on say 60% of the land (30% each). Original house on 40% of the land.

Based on other houses in the area end values would be approx 600k for new townhouses and 750-800k for period home.

So how would the apportioning and what would be the tax implications for arguments sake based on my figures above? I knew it probably looked to good to be true and the taxes do eat in to any potential gain.

 

[Paul@PFI]

Ok, thanks for the start Paul, just getting my head around all this, maybe a little more info. I have been looking at an older style period weatherboard home. It is on a largish block. Has street access on three sides.

Would renovate first and move in to existing house then do the subdivision. So are you saying you couldn't live in that house whilst two other houses are built on the land? Why do you think a DA would not be approved on that basis? Also not sure how would lose the main residence exemption? We would still be renting whilst renovating to make the house how we want it before moving in.

If subdividing it would be 2 new townhouses on say 60% of the land (30% each). Original house on 40% of the land.

Based on other houses in the area end values would be approx 600k for new townhouses and 750-800k for period home.

So how would the apportioning and what would be the tax implications for arguments sake based on my figures above? I knew it probably looked to good to be true and the taxes do eat in to any potential gain.

Side access will assist. Councils don't like people living on a building site. They tend to get run over. Hence the "site" may be the whole lot. Side access helps through.

You seem to have the main residence understanding incorrect.
1. It starts only when you commence to occupy. ie if its not from day one then pro-rata operates.
2. The portion you sub div wont be eligible.
3. You thinking of selling the home portion ?? Its possible that s6-5 may tax the "home" under ordinary income provisions rather than CGT exempt for a portion of time.
The main residence exemption is NOT as automatic as many believe.

http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD92135/NAT/ATO/00001

Buying the site appears a profit making intention on a isolated transaction and hence 100% of it taxable. I would be getting tax advice.

 

[SamL]

Thanks Paul.

The intention to buy the site is to have a house to live in! There is no doubt about that. We are just looking at sites that also have other capital potential so I would have thought it prudent to do some DD.

I have contacted my normal accountant in HOW for more specific advice but still waiting to hear back from them so posted on here knowing I would probably get a general response a bit quicker!

I know they are big assumptions, but on the basic figures I have provided how does apportionment work and what would be the profit that would allocated to each of us to be taxed as per normal income. That is the bit I am not 100% clear on as technically on paper there is still a mortgage and no direct cash profit.