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CGT Dilemma

Discussion in 'General Investing Discussion' started by garyt, 4th May, 2009.

  1. garyt

    garyt New Member

    4th May, 2009
    Melbourne Victoria
    Hi All,

    I purchased a property two years ago (house and land) in Melbourne, cost be about $300k and have been renting it out ever since (was empty for a month or two).

    The property sits on a large block and I am currently in the process of obtaining permits to demolish the current dwelling and build 4 x townhouses.

    This will add another 600-700k to my current loan hence increasing my total debt to approx 1m, my preference is so sell two of the dwellings off the plans to reduce debt and consequently risk in such volatile times.

    I have held the property for 2 years however I believe the acquisition date will reset on the new building completion date? If so I won’t be eligible for the 50% discount and this will significantly increase by CGT liability.

    I would greatly appreciate some advice on reducing my CGT liability, my goal is to sell two of the dwellings off the plans. Any ideas ?

    Upon selling the two dwellings I hope to purchase another property, however as a main residence. Is there any way of deferring or rolling the capital gains immediately into another property?

    Cheers, Gary
  2. jrc

    jrc Active Member

    3rd May, 2007
    Western, NSW
    You might be classed as a developer. This will also have GST implications on your sales.

    When you have the permits this could be a way to maximise CGT savings by selling the property to another entity controlled by you, ie you are maximising the 50% discount now.
  3. Superman

    Superman Well-Known Member

    6th Nov, 2007
    Gold Coast, QLD
    First of all I think with the scale of your investment, it is definitely worthwhile paying for some detailed taxation advice up front. A $1,000 in fees now could save you a lot more in the future. Write all your questions down and take them to an accountant who knows what he or she is talking about.

    Regarding jrc's idea, sounds good, but likely you will have to pay stamp duty again, which would likely be more than any additional tax you would pay from the CGT (not sure how much the increase in value has been in the last two years - likely not much in the current market).

    You CGT acquisition date doesn't reset on completion of the new dwellings. You may be thinking of GST - as it would be the sale of 'new' residential premises, there will be GST. You may elect to use the margin scheme to reduce your liability, but seek advice. You should be registered for GST.

    It gets a bit funky working out your capital gain when you sell things off the plan. CGT works on contract dates, but obviously the building costs won't be incurred until after the contract is signed - but they still form part of the CGT cost base.

    In a basic situation, if you have bought the house and land for $300k, add $700k for demolition, council approvals, construction etc, it gives you a $1m cost base (or $250k x 4). If you sold 4 x $400k town houses = $1.6m, then your capital gain would be $150k on each town house (assuming all are identical). 50% discount would apply.

    Currently the only CGT roll overs available are basically for small business owners who put the proceeds of the sale of their business into superannuation and retire. Also there is a 2 year deferral available when a business sells an active asset. Based on the information supplied you will not be eligible for these.

    You cannot defer or roll over the capital gain from the sale of one property into another. If you think you can you must have been reading too many Robert Kiyosaki books as he is always spruiking that idea and it is (almost) total bull **** and doesn't apply in Australia. Worth asking though. The best you can is plan for the capital gain an minimise it. Once again seek (and pay for) good taxation advice.

    I am a little confused regarding using the proceeds of the off the plan sales to reduce your debt, as you will only be receiving a deposit at that stage - the buyers wouldn't have to pay the rest until settlement / completion. But I suppose a couple of 10% deposits would help the cash flow.

    Good luck with the development and keep feel free to post updates to your progress.