Urgent advice required - Purchase 2 properties on 1 contract

[ozi]

Hi all,

I have a bit of a dilemma and need some advice from my fellow SS team. I am in the process of purchasing 2 properties in Melbourne from the same vendor. One is a house and one is a vacant block of land. The purchase is a private sale so no agents are involved. My plan is to rent out the existing house and build 2 units on the vacant block in the next 12 months, which will also be rentals. I don't have plans to sell any of the properties at this stage, but who knows what my circumstances will be in 5-10 years time.

Anyway, the properties are on 2 titles but the vendor is insisting on having a single sales contract. I would prefer to have 2 contracts but the vendor refuses as this will trigger capital gains tax for her on the vacant land. So I only really have one option - purchase both on one contract.

Does anyone have any experience doing this? What is the best way to finance this, i.e. one loan or two? If two, I assume that both properties will be valued independently. This should be interesting given than I'm buying under market value. Or should I just have a single loan and split it later one when it comes time to build the units? Having a single loan might be problematic though because the mortgage interest on the house will be tax deductible whereas the interest on the land won't be (?)

Are there any other tax implications I need to consider? Say I do eventually sell the units or house, how will CGT be calculated? Will it be based on valuation at time of purchase? For this I presume I would need an independent valuation at time of purchase.

I only have a day or two to sign the contract so not much time. I have called my accountant but he is tied up until next week Any advice/feedback would be appreciated.

Thanks

Ozi

 

[jrc]

If you are buying the vacant block to put IPs on the interest should be deductible - Steele's case

 

[Apocalypse]

Don't stress, happens all the time. Interest will all be deductible as you plan to build and then rent on the vacant block.

As to finance, depends on your preference. Personally I don't mind 'cross-collaterising' with multiple titles held as security against multiple loans - but then I have a good relationship with the local bank and they're happy to add/remove titles at a whim... probably because there is heaps of equity. I would just use one loan, and split them up later if you need a construction loan.

For CGT purposes you will need to apportion relative values to each title based on your purchase price. Easy enough to do with only two titles. You could get a valuer in, might help with proving equity when you want more finance. Ultimately you only need to demonstrate to the ATO how you arrived at your figures if requested.

 

[Kristine..]

Hi Ozi

The Contract is one part of the transaction

The RP Transfer of Land must still be separate for each title.

However, depending on how the State Revenue Office view the transaction, you may be charged Stamp Duty on the whole value, rather than on each separate transfer of title.


Regarding financing, the lender will exercise a mortgage over each title separately. Depending on the lender you choose, some lenders cross collateralise all securities as a matter of policy, but other lenders, even when holding multiple securities from the same borrower, treat each security separately.

The lenders will value each property separately. From the aspect of establishing a cost base for each purchase, the Consideration will be entered into the transfer of land and will be the price you paid for each property regardless that the contract was for multiple properties.

I think the vendor may be mistaken with regards to tax on capital gain for herself – the contract itself is not the material concern and any assessment of capital gain will be based on her actual circumstances. For example, if the house and block have always been occupied by her as one property or whether she bought the property and then subdivided it for profit or whether she bought the property and fortuitously subdivided it, in which case the ATO may view this as serendipity (stroke of luck).

Her circumstances are not your concern. Your circumstances are not all that complicated and you should not have any problem with arranging finance to suit you

Cheers
Kristine

 

[ozi]

Hi again,

Thanks too all for the prompt feedback! Very much appreciated

Jrc - thanks for pointing me to Steele's case! I was always under the impression that it wasn't deductible but instead capitalised. This is good news, but I will clarify my situation with the accountant.

Apocalypse & Kristine - thanks for the tips. I guess I am stressing too much over nothing. Its a little frustrating as negotiations have been going on for a few weeks now and its doing my head in. Regarding CGT for the vendor, the land is attached to her PPOR so you are probably right Kristine. However she is sticking to her guns and won't budge on this, so I will just have to accept the single contract. Splitting the contracts may save me 2-3k in stamp duty but I'm not too concerned as I am purchasing with about $70k in-built equity, so the numbers still stack up

Settlement will be a few months away so I still have plenty of time to work out the best avenue for finance structure. I now have a sense of comfort knowing the circumstances aren't too out of the ordinary

Regards,
Ozi