Please troubleshoot my plan for building in back yard. Am I missing something?

[wylie]

We are seriously looking at building two houses in the back yards of two IPs we own, back to back, two street frontage. To do this, we need to have the blocks split, creating two battle-axe block with entry from different streets.

That is probably the easy part.

Land tax on this parcel costs hubby $5K per annum (with UCV $500K and $530K). I'm guessing once we turn this parcel of land into four blocks, they would each have a UCV of $400K. This would push his land tax to $15K per annum.

I'm wanting to buy one IP from hubby. He pays capital gains tax, but the cost base is then reset at my purchase price going forward.

I will pay stamp duty of approx $20K to $25K depending on appraisal. That cost is worthwhile as it will pay for itself in saved land tax over two to three years.

Then, we build two houses in the back of each. We may build them together, or build one first, refinance and build the other. A builder has told me cost of a 4x2x2 double storey should see change from $300K, and we've allowed $800K in total to have these two houses up and running.

I have some questions that I'm hoping can be answered here. We will seek expert help in this, but these questions are ones I'm hoping to get ideas on before getting to the stage of seeing someone.

1. If I buy one IP, could the DA be done as one, ie. two houses drawn up to be approved as one application. The houses would be in different names by this time.

2. If not, we could seek approval for two new houses whilst both IPs are still in hubby's name, but I think this could get messy. If we did this, wouldn't I have to "buy" one house and one block of land, and pay more stamp duty?

3. Instead of buying one IP myself, I'm thinking I should look at buying in a SMSF. My understanding is that if I do this, the rent becomes tax free once I reach 60(?) and on future sale, I don't pay capital gains tax. Is this correct?

We have large debt on this double block and it is slightly negative. By taking advantage of "free" land and building in the back yards, we borrow more but the rent thrown off from four houses instead of two turns this from negative to positive.

We would hold these houses long term. We are 55 and 53 now.

I'd be keen to hear if I've miscalculated in any of this, and anything to watch out for.

 

[Paul@PFI]

3. Instead of buying one IP myself, I'm thinking I should look at buying in a SMSF

The SMSF would be non-complying. s66 prohibits a SMSF from acquiring an investment from a member or a relative. Hubby presently own the IPs. He is a relation of you.

This demonstrates the need for exert advice. Early. There may be a way to circumvent this BUT its complex and needs to consider far more.

You need to consider all costs incl such complications as GST (you are proposing to build new resi property and sell it to SMSF. Hold the other new IP.). Income tax, CGT, cost base apportionment, duties, Subdiv costs ? Councils are greedy.

 

[westminster]

2. If not, we could seek approval for two new houses whilst both IPs are still in hubby's name, but I think this could get messy. If we did this, wouldn't I have to "buy" one house and one block of land, and pay more stamp duty?

I'd be keen to hear if I've miscalculated in any of this, and anything to watch out for.

I can't answer any of the rest - that totally needs an accountant and a lot of scenario planning.

But if you got DA approval whilst they are still in your husbands name and you then bought one existing site BUT subdivision hadn't been done yet then you would simply be buying a house with DA approval not a house and a block.

 

[wylie]

The SMSF would be non-complying. s66 prohibits a SMSF from acquiring an investment from a member or a relative. Hubby presently own the IPs. He is a relation of you.

Bummer. I forgot we had looked at this last year in relation to buying my late father's house in a SMSF... and knew we couldn't do that. This time I didn't think of it. Thanks for the reminder.

This demonstrates the need for exert advice. Early. There may be a way to circumvent this BUT its complex and needs to consider far more.

We are very much in the "early" stage, only discussing it at this stage, but if we can do it, I'm keen to do it ASAP and get the houses built and the rent rolling in.

You need to consider all costs incl such complications as GST (you are proposing to build new resi property and sell it to SMSF. Hold the other new IP.). Income tax, CGT, cost base apportionment, duties, Subdiv costs ? Councils are greedy.

Would GST come into it? Is GST an issue only if we sell to SMSF?

Income tax.. we have some flexibility here to split distributions from a family trust. Neither of us works full time.

Cost base for the IP I buy would be reset on my purchasing of hubby's IP (assuming I buy in my name and not manage to get it into a SMSF). The apportionment once in my name when it goes from one block to two would be tricky, and I've no idea who works this out. I wonder if there is some formula they use when someone divides a block with a house on it and creates a new block. "Who" decides the $500K UCV block now becomes two blocks, and who decides what the new UCV is for each block. I'm assuming it would be BCC or OSR?

Capital Gains Tax. I have a choice of two houses to transfer to my name. My choice would be to choose the last one which we paid $460K and the cost base would now be about $480K. Its value would be about $650K so hubby will pay capital gains tax. The one we have held longer would mean a huge capital gain hit for hubby. Either way, once he pays capital gains tax on one or the other, the cost base is reset going forward.

Duties... If I cannot easily get it into a SMSF, I'll still go ahead and put one IP into my name. The OSR transfer duty will be approx $20K to $25K depending on valuation but this cost is repaid within three years in saved land tax.

Subdivision costs - I've been told by a builder that there is approx $28K per new house headworks plus, plus, plus, but that if we allow $100K for the costs to subdivide and get services up and running, plus allow $250K(ish) low set or "high $200Ks" for high set houses, we should be fine.

I've worked my figures on $800K in total, hoping to do it for less, but hopefully not go over that.

I worked on 2 x $300K (double storey), $100K headworks and subdivision costs and $100K for anything I've missed. It is rough I know, but we are only at the "rough" stage.

I can't answer any of the rest - that totally needs an accountant and a lot of scenario planning.

But if you got DA approval whilst they are still in your husbands name and you then bought one existing site BUT subdivision hadn't been done yet then you would simply be buying a house with DA approval not a house and a block.

Thanks westminster. That makes good sense.

 

[Tonibell]

We are seriously looking at building two houses in the back yards of two IPs we own, back to back, two street frontage. To do this, we need to have the blocks split, creating two battle-axe block with entry from different streets.

That is probably the easy part.

The two connected blocks sound like a great asset -can you develop something more on the land - like villas ?

 

[wylie]

The two connected blocks sound like a great asset -can you develop something more on the land - like villas ?

We have looked at that option. We've had developers look at the blocks recently. There was some confusion about whether townhouses can go up, but RPI seems to have clarified this and I've passed it on to the agent. The developers went to BCC who said our blocks were residential. This has never been mentioned even when we first went to a town planner six years ago, and there are infill townhouses just metres away. Assuming we are okay to build townhouses, if the developers come back to us and offer us a good price for the block, we will certainly consider it, but we don't need to sell, and don't mind having the debt as long as the asset is growing.

We believe we can put on four townhouses (maybe more?) but there is no way we will tackle that size job. We've also had several agents confirm our thinking that having four good sized houses on good sized blocks will be easier to get through council, easier to rent and easier to sell.

Building four townhouses would cost us over $1M and I figure that if developers are not jumping at this option, then there is no way we should consider it.

I'm much more comfortable having space and not squashing too much onto the block. We could probably make more profit, but the risks are much higher and the costs of developing it ourselves are much higher and way more stressful and complicated (for first timers) than two houses.