CGT trick on new development

[Nominees]

This is probably a bit more tricky a question, but some of you might know the answer.

We know that if we keep a property for more than a year we qualify for the 50% CGT discount.

Now this is the scenario. I have a block of land that I have had for more than a year and I want to build on it and sell once finished.

The land value has increased quite a bit. Is it possible to get the land valued BEFORE construction and only pay 50% CGT on the land gain ? and then 100% on the profit made from the construction of the house, or will I have to pay 100% of my total profit because I didn't hold the constructed house for more than a year.

For example buy land for 50K keep for more than a year, it is worth 70K.
So if I sell the land I would pay tax on 20K*50%.

However if I build a property for 100K and sell the whole lot for 180K what is my taxable income?

Scenario 1

20K*50% (gain the land) + 10K*100% (gain on property) = 20K

Scenario 2

30K*100% (gain on the whole lot) = 30K

Cheers,

Nom

 

[DaleGG]

Hi

No, you cannot do that, I am afraid. Nice try though!

Dale

Originally posted by Nominees
This is probably a bit more tricky a question, but some of you might know the answer.

We know that if we keep a property for more than a year we qualify for the 50% CGT discount.

Now this is the scenario. I have a block of land that I have had for more than a year and I want to build on it and sell once finished.

The land value has increased quite a bit. Is it possible to get the land valued BEFORE construction and only pay 50% CGT on the land gain ? and then 100% on the profit made from the construction of the house, or will I have to pay 100% of my total profit because I didn't hold the constructed house for more than a year.

For example buy land for 50K keep for more than a year, it is worth 70K.
So if I sell the land I would pay tax on 20K*50%.

However if I build a property for 100K and sell the whole lot for 180K what is my taxable income?

Scenario 1

20K*50% (gain the land) + 10K*100% (gain on property) = 20K

Scenario 2

30K*100% (gain on the whole lot) = 30K

Cheers,

Nom

 

[Nominees]

Hi Dale,

Thanks for the reply.
Will have to think twice before building then...

P.S: I remeber that the day the GST took effect, any builder that was constructing a house had to get a valuer to value the proeprty they were doing the day before since that would be GST free ....

Ashame we can't do something similar with CGT.

 

[hwd007]

Can you sell the land to a trust ? pay the CG tax upon sale and then build on it afterwords and sell with building on it with a lower capital gain.

Hmm you may want to spread the capital gain over two years.
1. Sell land to trust and pay CG tax at 50%
2. build on land and hold for another 12 months
3. Sell house and land at 50% discount again.

I can't see that this would be any different than building now and selling at 50% discount as you already have held the land for over 12 months, except for the possibility that when combining land and house, the value is multiplied to such a degree that it accelerates the appreciation of the entire asset.

eg note depreciation and selling costs are ignored for the purpouse of the exercise. Assume simple tax rate is 30% Assume construction cost is 100k

Apologies for the messy calcs

option 1 ( spread over two years )

1. sell to trust at 70k land 50k to 70k = 20k gain thus 10k assessable gain at 50% thus on 10000 thus tax = 3000 net gain = 7000 + 10000 = 17000

2. add house and sell cost 100k and sell 12 months later for 200k gain is thus 200k - (100k - depreciation - selling costs ) = 100k less 70K for land cost to trust, = gain of 30k thus tax paid is on 15k = 4500 and net gain is 10500 + 15000 = 25500

You could even sell the land to trust at a higher value to reduce the house and land gain at sateg 2 sell off 12 months later.

total gain over 2 years = $42500 total tax = $7500



option 2
land 50k add house sell 200k thus gain = 200k-100k-50k = 50k thus tax is on 25k at 30% = 7500 but net gain is 17500 + 25000 = 42500

total gain over 1 year is $42500 tax = $7500

Hmm they look the same. Hmm my numbers could be wrong here its late and I just wanna sleep. But I see no benefit with way.

But the benefit may be in the tax effects of real life where you may be on lower tax rates if its spread over two years using option 1.



Why sell anyway ? cant you just build on it and rent them out ?

Otherwise offer a 40 year lease on the land indexed to the CPI or some capital growth land value index ? that way you retain land ownership and the IP builder gets to write off the asset and claim the lease as a fully deductible expense each year, plus all the other expenses associated with owning a building.

You get a yearly return on the land plus capital growth. The building owner gets a better cash flow with less money down up front. You both get better cash flow outcomes as the money laid down is spread amongst two parties, land owner and builder. The builder could even on sell the building lease.

So long as the legal aspects are well covered including bail out options etc..

Just a thought.

 

[investor]

Re: Re: CGT trick on new development

Originally posted by DaleGG
Hi

No, you cannot do that, I am afraid. Nice try though!

Dale

Hi Dale

So does this mean that u have to hold the new house for a year to get the 50% discount even if the land was held for more than a year ?

Does this apply to a block of units that were previously on one title but now converted to strata title and sold ?

ie. does the block now have to be held for a year once they have been strata titled to get the 50% discount ?

Thanks

Regards

Investor

 

[Nominees]

Hi hdw007,

Thanks for the thoughts.
I will have to take into account stamp duty though .... (ouch!!!)

Nom