Bought house with brothers - tax stuff

[daniel cunningh]

Hi guys,

Was just after a bit of tax advice in regards to a purchase my 2 brothers and i just made.

Basically we purchased a 4 bedroom house with DA approved plans for subdivision and a new house. Our plan is to rent out the house that is there, build the new house, subdivide and sell both. The loan is under my younger brothers name (his income is $130k)

Purchase price was 825k, rent will be $700/week, cost of new build 350-400k. Hopefully sell both for around $800k each.

My question is are there any tax implications we need to know about that are not obvious? My 2 brothers will be completing the build (they are licensed builders). I was wondering are we better to charge them out at an inflated hourly rate (thus reducing capital gain but in turn increasing their individual income tax), or at a reduced hourly rate thus increasing capital gain but in turn increasing their income tax?

Any help would be greatly appreciated because we have not alot of idea in regards to taxation matters!

Thanks

Dan

 

[Shaneelastic]

Run the numbers, fortunately the numbers can be massaged

 

[GreenMedallion]

It looks like something you really do need an accountant for.

 

[daniel cunningh]

Yeah probably do need an accountant. Was just after a bit of guidance!

 

[Scott No Mates]

The amount of tax payable will depend upon how you have structured the ownership, how long you hold the property, whether the holding entity can benefit from the 50% discount on CGT or is fully liable for CGT.

The numbers look a bit rubbery if you expect to get $800k for the existing house after subdivision considering you paid $825k. That may punch a few holes in your budget.

 

[Rob G.]

Why would builders who purchase for a quick construction and resale be assessed for a capital gain ... sounds more like income ?

Why all the unhelpful suggestions about 'massaging figures' and 'charging yourselves' at non-market rates ? I am sure they did not come from your adviser regarding venture structuring before you purchased.

Where does GST fit into your collective plan ?

Cheers,

Rob

 

[westminster]

Hi guys,

Was just after a bit of tax advice in regards to a purchase my 2 brothers and i just made.

Basically we purchased a 4 bedroom house with DA approved plans for subdivision and a new house. Our plan is to rent out the house that is there, build the new house, subdivide and sell both. The loan is under my younger brothers name (his income is $130k)

Purchase price was 825k, rent will be $700/week, cost of new build 350-400k. Hopefully sell both for around $800k each.

My question is are there any tax implications we need to know about that are not obvious? My 2 brothers will be completing the build (they are licensed builders). I was wondering are we better to charge them out at an inflated hourly rate (thus reducing capital gain but in turn increasing their individual income tax), or at a reduced hourly rate thus increasing capital gain but in turn increasing their income tax?

Any help would be greatly appreciated because we have not alot of idea in regards to taxation matters!

Thanks

Dan

Generally its best to play it all by the books.
You will need an agreement between the 4 of you how you will all contribute cash/work etc and how profit is to be divided and how income (rent/depreciation/negative gearing) is to be divided.

As to your figures they seem a little odd. I don't see how you can split an $800k property and the front still be worth $800k

 

[Terry_w]

You say you bought with your brothers - who is on title?

You cannot employ yourself so how will wages be paid?

 

[daniel cunningh]

Thanks guys<

To answer a few of your questions:

- the property was basically purchsed for the value of the existing house and land as the new build is basically on the edge of a cliff so no one else was keen to take it on (but bear in mind their are plans approved so although difficult it is definatey doable). As such we will comfortably get 800k back for the existing house).

- The house was purchsed under the names of my younger brother Scott and his wife (my older brother Ben and i just put in 80k capital eachfor the purchase)

- My older brother will be the contracted builder (yes he is qualified) for the new house)

- it came up all of a sudden so we did not have time to look into setting up a trust etc or different ways of purchasing

- we are planning on taking approximately 1-1.5 years for the build


A couple of questions:

1/ do we need to hold the new property for one year from completion and subdivision to get the 50% capital gains tax exemption or is it from original purchase date?

2/ we could build and resell in a shorter time frame depending on tax implications. I noticed someone mentioned that capital gains may not be applicable as it could just be considered income?

3/ i don't understand the GST and what we have to pay it on?

Super confused but thanks for all the help its much appreciated

Dan

 

[daniel cunningh]

Oh and by the way Westminster:

- we all put in 80k each

- profits will be split in thirds (although this will be done on a personal level as the house is only under Scotts name)

- In terms of work my two brothers will just work at their normal hourly rate (as per what they would be earning if they were on another job)

- If we work weekends it will be all together and for free.

Thanks

 

[Terry_w]

Think about how your older brother who is not on title is going to be able to get his share of the profit.

 

[coastymike]

Sounds like it is on income account not capital so holding period will be irrelevant as cgt wont be applicable.

 

[daniel cunningh]

I'm still not really getting it.

So if we buy and sell in more than a year i know we get 50% reduction in capital gains tax.

Can we bump up the hourly rate of my 2 brothers so there is no capital gain? Or does this not really work because then they just pay more income tax.


Also as the land with the second house will only be subdivided towards the end of the project does this house need to be held for one year from completion date (subdivision) or just one year from original purchase date?

Alternatively does anyone know a decent accountant that specialises in this stuff that won't charge an arm and a leg as i'm sure it's not that complicated if you work in this area?

Thanks!

 

[alexlee]

Alternatively does anyone know a decent accountant that specialises in this stuff that won't charge an arm and a leg as i'm sure it's not that complicated if you work in this area?

Think about how much time and money it cost the 'decent accountant' to BECOME good at this stuff so that it's not that complicated.

Why should you get all that effort cheap?

 

[coastymike]

My masters of tax cost about 30k

 

[Aaron_C]

daniel - you have to understand that when you start going into business - then your capital gain is now on the revenue/income account - and you do not get capital gains tax concessions etc. Trading stock and GST become more relevant. Subdividing and developing is considered a business venture and is assessed accordingly.

 

[pinkboy]

What happens if your younger brother gets into financial difficulty, or his wife leaves him etc? Where do you stand? Do you have any legal protection drawn up?

Mixing business with family may seem like a good idea at the time, but you never know what is around the corner.

pinkboy

 

[Terry_w]

I'm still not really getting it.

So if we buy and sell in more than a year i know we get 50% reduction in capital gains tax.

Can we bump up the hourly rate of my 2 brothers so there is no capital gain? Or does this not really work because then they just pay more income tax.


Also as the land with the second house will only be subdivided towards the end of the project does this house need to be held for one year from completion date (subdivision) or just one year from original purchase date?

Alternatively does anyone know a decent accountant that specialises in this stuff that won't charge an arm and a leg as i'm sure it's not that complicated if you work in this area?

Thanks!

Don't blame you for not getting it!

The important thing to take out of this is not to assume CGT will apply. It may not. It may be income tax - with no discount.

it can be very complicated because you are dealing with several areas of tax law and several different entities, all of which seem to be related parties.

 

[daniel cunningh]

Alelxlee i'm not expecting something for nothing. I'm happy to pay decent $$ for a decent service. I'm sure it takes builders a lot of time and money to gain the experience and qualifications in their trade as well. All i was asking was if anyone knew someome decent that isn't going to charge $500 an hour. If you had 2 good builders recommended to you would you chose the one charging $60 or $100 an hour? I paid 20k for my degree as well but i'm still only paid the going rate.

Thanks Terry and the other guys for the helpful comments. It does seem pretty complicated so we are just going to pay someone for some help in this are!

Cheers

Dan

 

[Tillie]

Daniel, as you already noticed you and your brothers definitely need some professional help with the transaction. Contact Terry w he is tax lawyer and I think that he is accountant as well. He is more than qualified to deal with this stuff. Alternatively contact house of wealth team in Melbourne.