Buying two Titles at once then selling 1 straight away - CGT & Trust considerations??

[Hakuna Matata]

Hi guys

My wife and I are in the process of purchasing a second investment property in the name of our Trust (with corporate trustee) and it Settles in a week. This one is interesting as it is actually 2 Titles, with a house on one Title and a large colorbond shed on the second Title. The whole yard is fenced as just one property and the Contract, let?s say the purchase price is $170,000, is for the whole lot. As part of the loan application process a valuer has come out and agreed that there is enough value in the whole lot to cover the, say $150,000 loan (at this stage of the process they never value it above the purchase price!)

After Settlement I plan to move the fence line to physically separate the two Titles and immediately list the Title that has the shed on it for sale in an attempt to get my hands on some cash (instead of getting my hands on some equity if I was to keep & build instead). The Trust is buying the whole lot for say $170,000 and lets assume that the land with the shed will clear $50,000 once agents fees are taken out. I believe that the Title with house will have no problem being revalued in its own right at the same $170,000 so from a bank security point of view I don?t think that the bank will have any issue releasing the $50,000 proceeds of the shed Title sale to the Trust ? I would be keen to receive any advise on the do?s and don?ts of this process though!

Wondering what happens from here though as I have not had the Trust make any profit on paper before and I have no CGT experience?

Let?s say that the Trust already has a previous carried forward loss of $10,000. Also that I am the primary wage earner so the Trust is likely to disperse any gains primarily to my wife so that we pay less income tax overall.

? How do I work out if the Trust has to pay CGT?

? Do I need to get the land Title valued separately to the house Title just after Settlement so I have a formal starting value?

? If I sell over this valuation is the difference then liable for CGT (minus a portion of the appropriate legal costs incurred to purchase the whole thing, e.g. a portion (50/170??) of the stamp duty)?

? If I sell under this value can the Trust claim a Loss?

? If I sell within a certain quick time frame after Settlement is it CGT exempt as not feasible that it has really increased in value?

? If I sell after 6 months is there a 50% reduction in the CGT?

? What considerations are there in regards to when I time the sale of the land? If worthwhile I am happy to sit on it for X months if there is a step change in the CGT payable.

In good news I have already secured a tenant who doesn?t mind that the land with shed will be sold off and the rent is enough to make things positively geared with no need to use the proceeds from the land sale to pay down debt on the house Title (which I understand is the usual ?splitter? strategy plus I have no subdivision costs as already on 2 separate Titles.)

If anyone has any strong opinions on why I should not sell the Land but actually build instead, to either keep or sell, then I am open to your advice. I am strongly a buy and hold style investor but in this case I am keen to cash out the land to use the money for personal use. I think building would be a bit of a headache and I?m not sure I would make more than $50k profit anyway due to high cost of building and low values of finished homes in this regional town.

Does anyone have any advice on how the CGT and Trust considerations would play out?? I want to optimise the situation so that the most $$ comes through the Trust to us but have no experience in this situation.

 

[Terry_w]

Speak to an accountant (or tax lawyer) about splitting the loan in the relevant portions so that when you sell you only need to pay back the loan relating to the sold portion and can maximise deductions.
Probably no CGT but just income tax on the profit earned. If the land is on separate titles then there probably would be no GST but only if it is residential. So seek advice on the GST too.

 

[Paul@PFI]

My wife and I are in the process of purchasing a second investment property in the name of our Trust (with corporate trustee) and it Settles in a week. This one is interesting as it is actually 2 Titles, with a house on one Title and a large colorbond shed on the second Title. The whole yard is fenced as just one property and the Contract, let?s say the purchase price is $170,000, is for the whole lot. As part of the loan application process a valuer has come out and agreed that there is enough value in the whole lot to cover the, say $150,000 loan (at this stage of the process they never value it above the purchase price!)

After Settlement I plan to move the fence line to physically separate the two Titles and immediately list the Title that has the shed on it for sale in an attempt to get my hands on some cash (instead of getting my hands on some equity if I was to keep & build instead). The Trust is buying the whole lot for say $170,000 and lets assume that the land with the shed will clear $50,000 once agents fees are taken out. I believe that the Title with house will have no problem being revalued in its own right at the same $170,000 so from a bank security point of view I don't think that the bank will have any issue releasing the $50,000 proceeds of the shed Title sale to the Trust ? I would be keen to receive any advise on the do?s and don?ts of this process though!

Wondering what happens from here though as I have not had the Trust make any profit on paper before and I have no CGT experience?

Let?s say that the Trust already has a previous carried forward loss of $10,000. Also that I am the primary wage earner so the Trust is likely to disperse any gains primarily to my wife so that we pay less income tax overall.

Trust loss provisions may affect claiming this. Its not a fixed trust.

? How do I work out if the Trust has to pay CGT?

I suspect there isn't "CGT" to pay. I call it income tax". Your intent isnt to earn income its to sell one and keep one. That's ordinary income. This would be identical to the taxable profit if a cap gain happend anyway...ie under 12 mths.
? Do I need to get the land Title valued separately to the house Title just after Settlement so I have a formal starting value?

Reasonable apportionment. It would be very hard to consider that you can buy an asset on day 1 and sell it day 2 for a profit unless you have split value incorrectly to leave a low cost base on the one you keep (That's Part IVA also). A reliable basis for a alternative position may avoid a audit argument. A valuation that ?pportions the cost is required. The two titles have different charecters. One has no dwelling. One is vacant land (+ a shed worth nothing). Access, fencing, services etc all affect.

? If I sell over this valuation is the difference then liable for CGT (minus a portion of the appropriate legal costs incurred to purchase the whole thing, e.g. a portion (50/170??) of the stamp duty)?

No profit is based on cost ...Valuation may be irrelevant.

? If I sell under this value can the Trust claim a Loss?

Claim a loss ?? No. Losses carry fwd. Its a revenue loss. May offset future trust rent...May not too.

? If I sell within a certain quick time frame after Settlement is it CGT exempt as not feasible that it has really increased in value? Yeah right...So fast you don't pay tax.... A comedian.

? If I sell after 6 months is there a 50% reduction in the CGT? No not even after 12 months when the 50% CGT reduction actually kicks in. You intent is to sell. No CGT issues. You really should get some personal tax advice............................

? What considerations are there in regards to when I time the sale of the land? If worthwhile I am happy to sit on it for X months if there is a step change in the CGT payable.

Read above.

In good news I have already secured a tenant who doesn?t mind that the land with shed will be sold off and the rent is enough to make things positively geared with no need to use the proceeds from the land sale to pay down debt on the house Title (which I understand is the usual ?splitter? strategy plus I have no subdivision costs as already on 2 separate Titles.)

If anyone has any strong opinions on why I should not sell the Land but actually build instead, to either keep or sell, then I am open to your advice. I am strongly a buy and hold style investor but in this case I am keen to cash out the land to use the money for personal use. I think building would be a bit of a headache and I?m not sure I would make more than $50k profit anyway due to high cost of building and low values of finished homes in this regional town.

Does anyone have any advice on how the CGT and Trust considerations would play out?? I want to optimise the situation so that the most $$ comes through the Trust to us but have no experience in this situation.

You need personal tax advice. You have no idea and your ideas seem like you may make a rash decision if you don't get some personal tax advice on which to base your decisions.

Q : Is the interest of the vacant lots deductible as same as the house + land ??
Q : If you sell the vacant land what impact on the deductible loan will arise ??

 

[Hakuna Matata]

Sincerely thanks to both of you - I particularly like the comment "you have no idea"

Yes my intention is to sell one and keep one so sounds like CGT won't come into and just income tax (on the amount of income that the Trust disperses come end of this financial year).

The entire land (both Titles) have an assessed QLD Land Value of $26,500. Both blocks are exactly the same size and shape, however the one I will be selling will be on a corner but for these purposes I'll assume that they have equal land value of $13,250.

The shed is near new 6m x 9m Colorbond with triple roller doors on concrete slab so assuming its value is $11,750 then the 'value' of the land and shed is $25,000.

Deducting this from the overall value (sale price) of $170,000 then the house and its land is valued at $145,000 (or 85%).

Presuming I asked the bank to split the $150,000 loan 85% / 15% then I would have a loan of $127,500 for the house Title and $22,500 for the shed Title. If I sell the shed Title for $50,000 I'd give $2,500 to the real estate as commision, $22,500 to pay out the loan and I would have $25,000 left in cash.

Thanks for raising the point about deductability of interest during the time that I hold the land with shed. I am attempting to lease the shed out separately as short term storage for people that want to store their caravans or boats indoors so as I have the intention to derive income from it I assume that I can claim the interest on the $22,500 loan just like I can on the $127,500 loan. As long as I sell the land within 12 months sounds as though CGT won't come into it even though I am trying to rent out the shed to make income.

So from all that it sounds like if I sell the shed and land for $50,000 then I will have $25,000 profit in the Trust (hence $25,000 in our hands). Considering that the Trust will probably have a $10,000 loss from other properties then I will have $15,000 to disperse to my wife who will probably not have to pay any tax on it.

If the house Title retained the initial value of $170,000 then I have $42,500 in equity there, a portion of which I would be able to access to fund another IP purchase. I don't intend to sell the house Title for quite some time but I understand that 85% of the $4,485 legal costs incurred to purchase the whole lot will form part of its cost base if/when I sell.

If you are willing to give me any feedback on the above approach and sums I would love to hear it!

 

[Paul@PFI]

I don't really agree on your apportionment. Unimproved land value means nothing. I would ask a valuer or RE agent (for small fee) to determine the apportionment of your actual cost inclusive of legals and duty etc.... Based on how they would fairly split the value. They have an idea of what each would be worth and can "split" the cost rather than deduct one value from the cost and give a net difference. That's the approach and stuff the ATO quibble over. Deducting A-B isn't always arms length if you don't know what B is worth. They do it then its likely arms length. No dispute.

Have to ask if there is so much to be made that way why are they selling to you to make the profit ?

I would apportion the loan interest the same %. One loan if you can. Has the lender given consent to this ?? They may refuse or impose conditions, see it as a commercial deal etc...Worth checking. Imagine they want some repayt of the loan if they lose security.

You may also find the agent comm will be higher. Low value prop isn't same rate as a std lot. ie same amount of effort for a $10K lot v's $100K. Ran into a client with that once and he was shocked they wanted a flat fee.

 

[jrc]

Will the land you sell have its own building entitlement? Some country towns in NSW have land in say 1000 square metre allotments, but have a minimum land area for building of 2000 square metres.

 

[Terry_w]

I would say that the apportionment mentioned about is wrong. One parcel has a house on it and the other a shed so you need a valuer. Land value for land tax purposes will be lower than market value too.

 

[Hakuna Matata]

Once again great info. I feel like I've died and gone to heaven!

Just quickly: I did ask the agent if the current seller considered selling the Titles separately and she kind of stopped in her tracks and eventually said they didn't think of that. I guess some people don't want hassle. Both blocks are 760 m2 so should be fine to build.

Ideally I would pocket all the shed sale money as the house has enough inherent value to justify $170,000 and the rent makes the whole $150,000 loan positive geared so I don't really want that tax deductible loan to decrease.