Backyard subdivision? anyone doing it?

[Domma35]

Hi Domma35, here is a run down of how I would do a profit analysis using the following simple example:

-$500,000 original purchase price of old house on subdividable lot
-$ 25,000 stamp duty/ closing costs
(put a tennant in for 12 mths while all applications are put to council, assuming $400 per week rent, 6% interest, with nil depreciation, 30% marginal tax rate, and $5000 allowed for council rates, insurance, maintenance, water, this property is cash flow negative over 12 mths by
-$10,000 holding cost
-$40,000 subdivision (subdiv costs vary greatly but this should cover it)

so all up it cost a total of -$575,000 to carry out this project

now you own an old house on courtyard block, new value $400,000 plus a
courtyard block of vacant land at value $300,000

$700,000
-$575,000
= +$125,000 net equity that you have generated

now lets assume you sell both:

-$25,000 agent commisions and advertising costs
Total profit $100,000 but you still got to pay capital gains tax on this, you get a 50% discount for holding over 12 mths, so lets say you already have a day job and this extra $50,000 added onto your taxable income puts you into the 37% tax bracket you loose $18,500 of your profit

so all up you get to keep $81,500 clear for 12 mths of paper work, a few headaches, and clearing a block/putting up a new fence, not bad in my book.....

(disclaimer: this is just a rough guide to help the newbies follow my way of working it out, obviously results vary widely depending on multiple factors, always due your own due dilligence)

Hope this helps

Thanks Erica. Great post. In my case though we are living in the house on the subdividable land and can't lease it out.

So, let's assume the following:

- House and land is currently worth $500K.
- I spend $40K on a subdivision.
- House with reduced land is now worth $400.
- New subdivided block is worth $250K.

So I lose $100K on the value of the house. I have also spent $40K on subdivision so I'm down $140K.

However, I have made $250K on the new vacant block so I am up $110K at the end of the day.

Is this right and do you pay CGT on the proceeds made from the sale of the land?

Not sure in this case whether it is worth losing $100K on the value of my house to go through a year worth of paperwork to make back $110K and a $10K profit. Obviously this would be different if the subdivided land is worth more than $250K.

Your strategy of buying, renting and subdividing is better than living and subdividing I think.

Thanks,
Dom

 

[Domma35]

Just realised I had my sums wrong! Long day at work! Using my figures I'd make a $110k profit, not a $10k profit.

This is subject to CGT at my marginal rate right? And is also need to deduct agent fees?

Thanks

 

[K_Raheja]

If i were to find out if there are any pending subdivisions around my IP..how do i find out ? Ring the council ?

 

[YvonneVincent]

Just realised I had my sums wrong! Long day at work! Using my figures I'd make a $110k profit, not a $10k profit.

This is subject to CGT at my marginal rate right? And is also need to deduct agent fees?

Thanks

I am only newbie myself but I would say yes to both of ur questions

only issue is to find suburbs where I can buy the block with an acceptable looking house for ~only 550K and back block worth ~250K.....

 

[Stacey Survey]

If i were to find out if there are any pending subdivisions around my IP..how do i find out ? Ring the council ?

Jump on here and type in your address: http://services.land.vic.gov.au/maps/lassi.jsp

In the attachment I've grabbed a screenshot from around my area. The blue circled block is a completed subdivision, whilst the hatched block (circled in red) is a pending subdivision.

Cheers,

 

[Erica]

answer for Dom

cut and paste from ATO website:
Subdividing
If you subdivide land adjacent to your home, the new blocks will generally be subject to capital gains tax. However, if you purchase land to subdivide and resell for a profit, or use the land in a business-like way, the proceeds may be treated as ordinary income and you may need to register for GST.

I'll try to explain how you calculate the Base Cost and how the ATO calculates what proportion of your PPOR subdivision is CGT applicable as per my accountants advice to me, it's long winded but here goes:


1. Upon subdivision you will have 2 council notices and 2 Valuer General valuations, which are used to apportion the percentage split on the value of the property, lets say the valuer general splits them this way:
a. exisiting home and land $350,000 which is 70% of original whole property
b. vacant land $150,000 which is 30% of whole property
(The VG always values well below market value, it is not the actual $value but the %split that is important.)

2. Now for the ATO you need to work out your base cost of the vacant land, so lets assume you bought your PPOR a few years ago for $400,000, 30% of which is $120,000, plus you add on capital works to your base cost so +$40,000 subdivision costs so your BASE COST IS $160,000

3. Now you sell your vacant land for $250,000, your capital gain is sale result minus base cost of $160,000= $90,000 the agent commision and advertising of $10,000 is deductible and you get a 50% discount for ownership greater than 12 months, so you pay tax on $40,000 at your marginal tax rate.

4. (I'm going to assume you are earning a decent wage from your day job of $80,000 wage) so this extra $40,000 on your taxable income pushes you into the 37% bracket, you will lose $14,800 of your profit to the tax man.

(disclaimer, I am not an accountant, I may be wrong, always get your own professional advice)

hope this helps

 

[K_Raheja]

Jump on here and type in your address: http://services.land.vic.gov.au/maps/lassi.jsp

In the attachment I've grabbed a screenshot from around my area. The blue circled block is a completed subdivision, whilst the hatched block (circled in red) is a pending subdivision.

Cheers,

Thanks for the link.

 

[gooram]

looks like the numbers on a morley retain and subdivide, is that where yours was gooram?

No, it's in St James. A good hunting ground IMHO, but City of Canning conditions can be a bit restrictive and onerous.

 

[sanj]

ah ok. i dont follow that area often but did have a look recently and prices do look a fair bit higher than they did a year ago

 

[Nash13]

If i were to find out if there are any pending subdivisions around my IP..how do i find out ? Ring the council ?

Try planningalerts.org.au