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My Granny Flat Dilemma

Discussion in 'Development' started by Olly, 14th Aug, 2015.

  1. Olly

    Olly Member

    Joined:
    2nd Jul, 2015
    Posts:
    13
    Location:
    Fairfield Heights, NSW
    Apart from my PPOR I have a 1 bedroom flat which I'm thinking of selling in order to build a granny flat in my own backyard to rent out. My brother in law says I should borrow against the flat to build the GF. I also have access to a $200K LOC I could also use. So Q1 is this - which way is the best way to go (assuming a bank would let a pensioner borrow against their flat to build a GF)? I do have to answer to Centrelink about everything I do because I'm on a pension so take that into account if it makes a difference. I'm yet to see them to see how all this effects my pension.

    I remember some years back that if you had a property worth $300k - you still had a property worth $300 if you built a GF in the backyard. So Q2 is - is that still the case or do they in fact add value now (even though you've lost some of the land building it) because of their growth in popularity and people being generally more investment savvy.

    I have asked my accountant what I'd end up with if I sold the flat and I can't follow what she's done. Can someone decipher the following emails. I don't get the $27K bit in her first reply, and in her second reply I was following it until she got to the discount bit (don't know what that is all about) and then she mentions "Net proceeds from sale at $280,000" when her working out is on $270K so I'm confused.

    Thanks!

    Me:
    Are you able to give me an idea of how much I'd end up with if I sold my flat.
    I asked the RE agent today what it would fetch and he said 280-300k.
    You have my statements so you can see what I owe on it. From memory 50kish and I bought it for 64.5k
    ____________________________________________________________________________
    Her:
    That would be a taxable gain of about $100K – if you’re not working that would end up with about $27,000. Once you paid the legals, agent fees, the tax and cleared the mortgage I think you’d be pretty close to $190 - $200,000 ahead
    _____________________________________________________________________________
    Me:
    Sorry to bother you again but I'm a bit gobsmacked. Are you saying I would end up with 190-200K even AFTER paying all costs and CGT (I'm not working-been on Disability pension for 10 years now).
    _______________________________________________________________________________
    [​IMG]
    Her:
    I Think so!
    This is my assumption…
    Purchase + costs $67,000
    Sale – costs $270,000
    Gain = $203,000
    50% discount = $101,500
    Tax on $101,500 = $25,502
    Medicare = $2,030
    Net proceeds from sale at $280,000
    $270,000-$25,502-$2030-$50,000(loan)=$192,468

    Obviously this is a rough estimate, but a fairly reasonable guide
    ____________________________________________________________________________
     
  2. S1mon

    S1mon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    257
    Location:
    canberra
    probably not posted in the right forum...but anyhow her workings seem correct..

    I assume she meant to say 'if you’re not working that would end up with about $27,000...tax owing after the sale'.

    the 270 bit says 'sale - costs' - i guess she is assuming 10k agents fees + conveyancing (selling costs)

    the 50% (capital gains tax) discount is because you held the asset for longer than 12 months...so you only pay tax on half the gain....
     
  3. Olly

    Olly Member

    Joined:
    2nd Jul, 2015
    Posts:
    13
    Location:
    Fairfield Heights, NSW
    Thanks. Makes more sense now. I think she assumed I knew more that I actually do! Yeah, I wandered if this was the right forum or not because it's a bit of a mixture (financing & building)
     
  4. Beelzebub

    Beelzebub Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    568
    Location:
    Lost
    Not taking into account things such as your age and the impact this may have on your pension but it seems to me your brother in law is correct: Borrow against the flat to build your granny flat. Then you have two properties paying rent instead of one. Of course this advice has many qualifications.

    Another option could be to subdivide your backyard and build a unit out the back and sell or rent out the unit. Depending on where you live you could do this and sell your flat and the unit and you may find you losing the pension won't be such an issue for you. This assumes you have a decent block in a suburb of Melbourne or Sydney?

    Anyway, heaps of experienced people on here who know more than me so you have come to the right place