As detailed here, my family is undertaking a subdivision project on land inherited from our grandmother/mother-in-law. Rockstar suggested I post in here about our financial structure for advice or scrutiny or experienced property investors. My brother is an accountant and is running through the numbers to make sure our current plan is the best course of action, but I post it here also for the forum's consideration.
The property in question in pre-CGT (by a long way), but has been held by the estate since 1999. I think the title is in mum and my bro's names (as executors), but the ownership is split five ways. Each of the five owners has lived in the house at some stage, although my brother and one sister own other properties in which they live. Mum has an IP, which was formerly PPOR before she moved to the current residence. My other sis and I currently own no other property. If we were to sell the house and land as is, we could each elect to claim it as PPOR for the period since 1999 and thus avoid CGT. This would mean that my brother and sister who own other properties would pay CGT upon sale of their properties for the period until the inherited property is sold (prorated), but could add interest and rates paid and costs of any improvements to their cost base.
However, if we were to subdivide the land in our own names, we would be deemed by the ATO to be carrying on the business of developing properties (I don't have the relevant links at hand, but read case studies on the ATO website some time ago). We would then be liable for CGT on capital gains made from the sale of the allotment from the value of the house and land as at 1999 (likely to be a lot; did some rough calculations of upwards of $45k based on a 30% tax rate). Instead, we can set up a unit trust or discretionary trust and transfer the property to the trust at current market value. We would thus avoid the CGT, but instead be liable for stamp duty on the transfer (around $20-25k). The trust would then carry out the business of developing the land and pay out the income to us as beneficiaries.
Mum will be buying a block of land off the trust on which to relocate the house to, and will have to pay stamp duty ($1.5 to 2k) on the transfer, and mum and I are think of buying another block for a joint duplex build, so we would be up for more stamps on that.
So, yes, it does involve a lot of transferring of things around, but at this stage it looks to be the cheaper option. It does mean the state gets more of a cut at the expense of the federal government.
Any thoughts?
The property in question in pre-CGT (by a long way), but has been held by the estate since 1999. I think the title is in mum and my bro's names (as executors), but the ownership is split five ways. Each of the five owners has lived in the house at some stage, although my brother and one sister own other properties in which they live. Mum has an IP, which was formerly PPOR before she moved to the current residence. My other sis and I currently own no other property. If we were to sell the house and land as is, we could each elect to claim it as PPOR for the period since 1999 and thus avoid CGT. This would mean that my brother and sister who own other properties would pay CGT upon sale of their properties for the period until the inherited property is sold (prorated), but could add interest and rates paid and costs of any improvements to their cost base.
However, if we were to subdivide the land in our own names, we would be deemed by the ATO to be carrying on the business of developing properties (I don't have the relevant links at hand, but read case studies on the ATO website some time ago). We would then be liable for CGT on capital gains made from the sale of the allotment from the value of the house and land as at 1999 (likely to be a lot; did some rough calculations of upwards of $45k based on a 30% tax rate). Instead, we can set up a unit trust or discretionary trust and transfer the property to the trust at current market value. We would thus avoid the CGT, but instead be liable for stamp duty on the transfer (around $20-25k). The trust would then carry out the business of developing the land and pay out the income to us as beneficiaries.
Mum will be buying a block of land off the trust on which to relocate the house to, and will have to pay stamp duty ($1.5 to 2k) on the transfer, and mum and I are think of buying another block for a joint duplex build, so we would be up for more stamps on that.
So, yes, it does involve a lot of transferring of things around, but at this stage it looks to be the cheaper option. It does mean the state gets more of a cut at the expense of the federal government.
Any thoughts?