Join Australia's most dynamic and respected property investment community

Flipping too costly?

Discussion in 'Accounting & Tax' started by SirDingo, 15th Mar, 2016.

  1. SirDingo

    SirDingo Well-Known Member

    Joined:
    12th Mar, 2016
    Posts:
    87
    Location:
    SA
    In this hypothetical situation, an investor decides to spend a year flipping houses.

    He buys a house for $200k.
    Holding cost, stamp duty and renovation is $20k.
    Sells for $260k.
    Gross profit after selling costs is $30k.

    He manages to do this 4 times in total in a financial year for a gross profit of $120k, effectively buying himself a job.

    What would his net take home income be after tax obligations such as CGT, income tax, (GST too?) etc?

    Would the taxes make it all seem not worth the risks and effort?

    Cheers
    SD
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,600
    Location:
    Adelaide, SA
    Yes, I think so.

    By time you pay CGT and agents fee to exit, then stamp duty and mortgage costs to re-enter, you may as well have just kept the original one.

    We've done a couple of these ourselves. Instead of selling we revalued and pulled the equity back out which was deposit on the next one. Repeat ad infinitum if you have a good broker.
     
    skuzy, Jacque and SirDingo like this.
  3. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    2,962
    Location:
    Perth
    I'm no accountant but if you did this 4 times in a year it's not CGT territory but income tax as you are not doing this as an investment but to make money.

    I believe you would then treat the $120k as income tax - no CGT, no GST (only for new builds)

    If that was his only income then it would be take home around $85k
     
    Hedgy, Prosperous, York and 3 others like this.
  4. Xenia

    Xenia Adelaide Property Manager Business Member

    Joined:
    21st Jun, 2015
    Posts:
    2,347
    Location:
    4/136 The Parade Norwood, South Australia
    If you are flipping you do not remain exposed to the debt. But yes it does become a job and an income if you are doing it multiple times.

    It is not classified as investing and subject to income tax and GST however one of the accountants may be able to comment further.
     
    SirDingo likes this.
  5. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,173
    Location:
    Adelaide, SA
    Before even looking at tax, look at the real transactional costs. In this scenario:

    Each purchase would have the following:
    Govt Charges: $8,411
    Purchase Conveyancing: $1,000
    Selling costs: ~$8,000
    Sale Conveyancing: ~$1,000

    Total: $18,411

    I doubt you'll be fitting much into a renovation budget just on that - and this doesn't factor interest and fees at all.

    Transactional costs are huge in Australia, so flipping is only reasonably profitable for the following people:

    • the real estate agent selling your properties
    • the conveyancers handling your transactions
    • the state government
    You get to keep the scraps. Alternatively the option is to do as DT has mentioned, retaining the property and using the equity to purchase the next. Using your example, at the end of 12 months you have a portfolio a little over $1mil which will no doubt be cash flow neutral, if not positive.

    I know what I'd rather choose.
     
    Northy85, Hedgy, Blueskies and 10 others like this.
  6. sauber

    sauber Well-Known Member

    Joined:
    27th Jun, 2015
    Posts:
    185
    Location:
    VB
    This i like Corey cause when you watch those reno's shows on 9life they say they makes all this cash but don't factor in all the associated costs of selling & buying them!
     
    JacM likes this.
  7. sauber

    sauber Well-Known Member

    Joined:
    27th Jun, 2015
    Posts:
    185
    Location:
    VB
    but also if your not a builder thats another kettle of fish too builders guarantees etc.... cause if it was the case everyone would be doing it..
    Sauber.
     
  8. Nemo30

    Nemo30 Well-Known Member

    Joined:
    31st Dec, 2015
    Posts:
    440
    Location:
    Somewhere
    Sauber it doesn't necessarily have to be on that scale. It could just be a modern refresh. New floor and window coverings, paint, maybe a new kitchen. House could just be filthy and a clean and some of the above makes a world of difference.
     
  9. Perthguy

    Perthguy Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    4,798
    Location:
    Perth
    The shows I watch do factor in costs of selling in particular, which they call closing costs and can be up to $45,000! :eek:

    So they sell for $100,000 "profit" and after costs might walk away with $30k or $40k. This is disclosed clearly on the show. Once they tell you the real bottom line, the results are far less impressive.
     
  10. bob shovel

    bob shovel Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    5,390
    Location:
    Somewhere in the land of Oz
    @D.T.
    We're they IP's with a quick get in get out reno? Or did you live in them?

    Would like to do more reno's one day, holding off course
     
  11. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,600
    Location:
    Adelaide, SA
    One of them was completed by purchase settlement date, then rented on first day of ownership :)
     
    Prosperous and bob shovel like this.
  12. MTR

    MTR Well-Known Member Premium Member

    Joined:
    19th Jun, 2015
    Posts:
    7,493
    Location:
    Perth, Melbourne, USA
    Xenia

    I am not an accountant but perhaps ATO would see this as a business and therefore no CGT consession and no more than 30% tax?

    MTR:)
     
  13. MTR

    MTR Well-Known Member Premium Member

    Joined:
    19th Jun, 2015
    Posts:
    7,493
    Location:
    Perth, Melbourne, USA
    yes, I think this is correct
     
  14. MTR

    MTR Well-Known Member Premium Member

    Joined:
    19th Jun, 2015
    Posts:
    7,493
    Location:
    Perth, Melbourne, USA
    Personally a lot of hard work for very tiny returns just from the figures quoted above. The problem is the buying and selling costs etc that is the killer for sure
     
    D.T. and sauber like this.
  15. sauber

    sauber Well-Known Member

    Joined:
    27th Jun, 2015
    Posts:
    185
    Location:
    VB
    i agree well said.
     
  16. SirDingo

    SirDingo Well-Known Member

    Joined:
    12th Mar, 2016
    Posts:
    87
    Location:
    SA
    So, if the ATO decides that your house flipping is a 'business' and GST becomes applicable, you would need to calculate and pay them $27,000 if you sold the house for $270k ?
     
    Xenia likes this.
  17. MTR

    MTR Well-Known Member Premium Member

    Joined:
    19th Jun, 2015
    Posts:
    7,493
    Location:
    Perth, Melbourne, USA
    @Paul@PFI would be able to give you further info on this
     
    SirDingo likes this.
  18. SirDingo

    SirDingo Well-Known Member

    Joined:
    12th Mar, 2016
    Posts:
    87
    Location:
    SA
    Thanks very much for the really insightful feedback being posted so far. It's very helpful indeed.

    The comments regarding the feasibility of the situation are very good, but the crux of the issue is not so much an opinion of if it is 'worth it', rather, it's a question of tax.

    If someone flips 4 properties in one financial year and totals $120,000 in pre-tax profit, what would the net profit be after all tax obligations have been paid? (and what are those obligations, GST? CGT? Income tax, etc?)?

    Cheers,
    SD
     
  19. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    2,962
    Location:
    Perth
    GST is only on new construction not on renovations/selling existing as far as I know.
     
  20. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    2,962
    Location:
    Perth
    The question is one step before that. What entity and structure means I can claim the most of holding, stamps, renovation etc to end up with the most amount of money after tax?
    Because entity A might actually be $150k minus tax, entity B might be $140k minus tax and entity C might be $120k minus tax.