House fire and potential subdivision

Long time property investor. We have had a major fire in a tenanted property, probable demolition. People and pets OK.

Reminder for all property investors that it can happen, and to have the insurance right. We are OK.

There may be an opportunity to subdivide and build two new houses. Options would include keeping or selling one or both houses.

I would be grateful if there was some discussion of what we might need to consider from a tax point of view, including:
- Capital works deductions for the loss of the existing asset
- GST on sale
- CGT calculation
- Is it considered a new house for GST purposes if we are able to keep the slab?

Anything else we need to think about?

Not currently registered for GST.

 

Before you do anything settle the insurance. While settlement is taking place the land/ house is not something you can do anything with. Ownership essentially reverts to the insurer while they decide what to do with the claim. For example, they might pay you a settlement and then sell the land to try and recoup losses.
So, talk to your insurer about what happens next and go from there. Get legal advice if you are not happy with the process.

 

Relates to the US, but helpful:
http://www.insuranceclaimrecoverysupport.com/top-insurance-claim-tips/fire/

 

Insurers have been playing with fire - Shine Lawyers

 

Has this happened in Australia? - I mean, a home owner with insurance suffering a house fire and the insurance company seizing the land on which the house is built?

I don’t see how that could actually occur? They could refuse to pay out on a claim for the building, but the land would still be mine.

 

I've seen a few houses damaged by fire, sold by insurers, so I would guess yes. There is a claim's process though.

 

With major car claims, the car in question is the insurer's, until they decide to write it off or repair. You have to get permission to retrieve your possessions and inform state registration body's that the registration is no longer being used.

 

See the link by Shine Lawyers (Au)

 

That’s a worry. I’m very fond of my location and find it surprising that the insurance company would have that authority. Could you explain a bit more about the process?

Do you mean that after my house being destroyed and me making a claim, the insurer would treat it like a car and say it’s not worth rebuilding - we’ll pay you out for the house and land (even though only the building is insured) and you’ll have to find another block of land.

I’m going to check my policy as I’d never noticed they had that right (though car insurer’s are always pretty upfront about the fact that they can do this).

 

I believe so, but like most insurance claims there's an appeals process, and the tribunal can be appealed to. Having not gone through it myself I'm not sure, I just would warn people from assuming that insurance is an easy thing to sort out, or that access and ownership are not controlled by the insurer (for a while at least).
It does not seem to be the case with all claims as most bush fire victims seem to rebuild in situ which likely affects final settlement value.

 

Could any other forum members shed some light on this?

 

Sounds more like insurers can deny a claim If there is arson by the owner/insured.

Must be more to it for an insurer to have a claim over the property as the insurer's loss would be close to zero ie value of the insurance policy if they chose to terminate the policy

 

You need personal tax advice. Rebuilding can trigger a CGT rollover event and that can be good but there is a time limit for replacement assets and the replacement asset rule doesnt also deal with a subsequent sale - That takes the land into trading stock territory, GST etc. I have had a couple of clients with tax issues after a major fire and you need to understand them all.

- Scrapping deduction
- Income tax issue/s if lost rent is claimed (often 12mths). ...Tip : At this time of year DONT rush the claim !!
- CGT rollover relief
- CGT event for trading stock
- Margin scheme
- Effect on CGT costbase for the land.
and a bit more

Your insurance claims/s should be #1 and DO NOT accept a offer without extensive legal advice. This would also likely cover liability issues. eg could the tenant find you liable ? eg Electrical fire in meterboard etc caused their loss.

You firstly need to define what your loss is. Then once that is known what the insurer will pay and how much your lender will take. They will typically require any property loan to be 100% repaid since that is in the fine print. If they allow it they may refinance the land however as it cant produce income dont expect it. Banks like to take their money then negotiate. Once all the property stuff is sorted you should later consider options for the land.

The land is yours and nothing to do with the insurer excepting claims for damaged fencing and structures and the need to clear the land - Typically a buildings policy contains these provisions. Three other clients each considered reuse of the slab and council refused each of them since it is are affected and doesnt comply with approvals and inspections etc. One was hit with a penalty for not removing the slab promptly. (It is a hazard) and fully fencing the site.

Insurers will never sell the land. Its not their property and they will not want the hassles and costs anyway. The policy clearly defines what they will do - Repair, replace or pay you for a total loss. The land is neither insured or lost.

 

Thanks Paul, great things to think about.