Funding Development - Cash or Equity?

Just a quick question for the tax gurus. I'm in the early stages of developing a property I own - just getting initial sketches done now. I'm wondering what the best way to fund the development is, from a tax and/or cashflow perspective?

I've got cash offsetting my homeloan (PPOR), and I've got a comparable sum available as an equity loan I've drawn down (also sitting in an offset account).

Is there any benefit (either for cash-flow or tax purposes) to paying for the pre-development and/or construction costs using the equity loan as opposed to just using cash? Will the interest for the pre-construction costs be deductable at any stage? Both loans (PPOR & equity) are at the same interest rate, IO.
 
You don't say whether this property will be an investment or not.

Either way it would be better to borrow and keep the cash in the offset.
 
Assuming you propose to sell, the only difference between using cash and borrowed funds is that the interest cost would reduce the profit on sale...when sold - not during the build.

If you plan to keep, using borrowed $ is smarter as you then end up with interest to offset the income etc
 
Question that could apply to the OP as well, apportioning the loan which was used for development costs.

Example.

Purchase Price $400k
Purchase Costs $21k (stamps/legals etc)

$421,000 loan used to aquire site.

Development Costs $70k (council, demo, water, engineer, architect, survey, convey)

Say the lot was split into 3 un-even lots in size. Most would like the loan restructured so no x-coll and debt was against the related property for ease, but how would would the costs be split?

Would it be ($400k + $21k + $70k) / 3 = $163,666?

Or would it be divided based on % of the site for each lot?
 
The apportionment basis is one for a valuer ** to APPORTION the existing land cost based on a reasonable basis.

1. If its all VERY homogenous land you could DIY based on m2
2. If its non-homogenous land (ie trees on one, sewer easement on another and water access to third) then get a valuer to do it.

Important you apportion and don't use a value subtraction method. eg : Value one of the lots as $300K therefore other 2 is the difference.

Murphys law applies to apportioning. The more you try to push costs to one or other block the more things will go wrong and you will regret the choice later.

The valuer will include consideration for such things as common property that is unusable, driveways and right of way and similar concerns. I recently had a enquiry about a two lot subdiv...Easy to apportion based on m2 but it was a difficult block and 30% of one lot was 60degree fall and couldn't be used. Other lot flat and has water views (glimpses :) ) The rear driveway is permanent carport use v's the front must be kept clear.

Use this % thereafter except for build which may need some adjustments in non-homogenous size etc....Typically floorspace m2 works if all are built and finished in like manner. No point getting too fussy about it. One area I do get a few questions is fencing. No need to get silly and design a complex formula.
 
Makes sense, I should of really thought a little bit more about it. Let me know if you think this makes sense, this is for my 3 lot development.

Purchase Price / Cost - Split by m2 as all usable block.

Architect / Survey / Engineer / Council / Demo - split evenly

Aroborist - Report was required for two trees on two of the lots, so wouldn't apply to one of the lots.

SA Water - Split evenly for the meter costs, but for the main extension as above it was required for two of the three lots. The existing connection will be used for one of the lots.

If above is correct works out better than splitting by 3 as the two with more costs are the rentals, but sounds fair enough as the costs do relate to each property.
 
Makes sense, I should of really thought a little bit more about it. Let me know if you think this makes sense, this is for my 3 lot development.

Purchase Price / Cost - Split by m2 as all usable block.

Architect / Survey / Engineer / Council / Demo - split evenly

Aroborist - Report was required for two trees on two of the lots, so wouldn't apply to one of the lots.

SA Water - Split evenly for the meter costs, but for the main extension as above it was required for two of the three lots. The existing connection will be used for one of the lots.

If above is correct works out better than splitting by 3 as the two with more costs are the rentals, but sounds fair enough as the costs do relate to each property.

The above items could be addressed differently and wouldn't be unreasonable either. Arborist report and actions are required on two lots but relate to the whole DA. Water very trivial and just 1/3rd each may be easier.

I have never seen ATO query the small stuff. The land and the build works are most important. All DA costs usually split by number of blocks but M2 can also work.

Like valuations there are two opposing views. Most people try to push costs somewhere esp if one becomes a home ;)
 
Interesting. I did forget to mention that no sales are planned, intention is to hold. I guess what I'm interested in is whether the interest for the pre-construction costs will be deductible once they are available to rent.
 
Shorty - That seems to sit with the view in Steele's decision. The INTEREST cost accumulates and can be claimed when its available for rent. Steele's case concerned a site where ALL where built for rent.
 
Thanks Paul. When you say accumulate, would the accumulation period be limited to the financial year the property becomes available for rent (and beyond) or could you claim retrospectively for interest incurred in a previous financial year?

[Edit - never mind, I read the case. It seems that it's all deductible as long as the intent is to produce income]

Thanks again Paul.
 
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