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One development funding loan for all OR one for each property built to keep

Discussion in 'Accounting & Tax' started by ray63, 12th Oct, 2016.

  1. ray63

    ray63 Member

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    Having paid off the PPOR home loan completely and with redraw available to fund the development costs of a townhouse development (not securing the home loan), funds are being redrawn to fund the DA and BA process to build three townhouses to keep. Construction costs will also come from redraw.

    However, at some point in the future, one or more of the townhouses will possibly be sold, but in the interim, the properties will be rented.

    The cleanest solution would appear to be to have one loan for each property, and it would appear as though St George's loan product will allow this to be done. But is this really necessary?

    Having separate loans presumably would allow for the proceeds of the sale of one townhouse to pay out one loan, and the balance going into our pockets. We could still benefit of any negative gearing advantages on the remaining loans and townhouses.

    If we only had one consolidated loan for all of the townhouses, then we would need to somehow determine how much of the loan to pay down, since part of that loan which was used to develop the now sold townhouse, is no longer for income producing purposes. We couldn't pocket 100% of the sale proceeds without paying down at least some of the loan. But we'd want to keep the paid out amount to a minimum to benefit from any negative gearing that may exist.

    If the single loan approach is acceptable, how do we determine how much of that loan to payout with the sale of a townhouse?

    If maintaining a single loan is not ok, then maybe it would have been best to split at the start, and redraw equal amounts from each of the three loans to pay the DA/BA costs.

    However, that wasn't done, so maybe now the loan should be split into three, with each loan sharing one third of the current amount outstanding, and future costs to BA shared 1/3. Construction costs may not be 1/3, given different size of townhouse and land size. I imagine the ideal situation would be to try have the final loan balances proportional to the value of each townhouse at completion.

    Any suggestions?
     
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  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If you're hoping to sell one, three splits would be best. It will also allow them to not be cross collateralised after they are completed. You will need to work out the actual costs for each build - you would need to do this regardless for CGT purposes. Speak to your accountant about working out the cost base for each unit.
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Ive written a tip about this in the tax section. Basically i say get one big loan for the whole project and them split it into relevant portions at the end based on a reas I nable apportioning method. Do this before selling one so that you can then pay down the debt associated with that property.
     
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  4. ray63

    ray63 Member

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    Love the Tax Tips, Terry, I guess you refer to Tip 13 although the actual tip doesn't directly address this question, so apologies for not delving into the tip's thread. Is there an advantage to wait until the end of the development or conversely, why shouldn't it be done now. I believe the bank will do this without issues now, but how knows what might change in 12 months time. Of course, one development loan is easier to administer if we don't have to split. Indeed, I think Tip 13 suggests splitting up front - planning up front.

    Whilst the developed property is not securing the development loan, you make a good point Jess - There is also a loan for the site from a different bank, and this will need to be split at some point, probably apportioned based on land value or maybe size of the final lots, since that loan was to buy the land, and soon to be demolished house.

    Thanks for input Jess and Terry.
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You might like to refinance the development part of the loan into the loan that's currently for the site (or completely refi to another lender) - this will make it a little easier to manage and can tidy up the whole lot at once.
    Edit to add - I mean after the construction is complete.
     
    Last edited: 12th Oct, 2016
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Soon to be demolished ? Scrapping deduction ?

    Split the loan after completion. Some lenders may allow refinance that is more favourable val after build. Split at that time.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes it could be split now. But the problem will be that some expenses will relate to all properties so it will be hard to split each expense
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It wasnt tip 14 i was referring to but another one on subdivision. I havent got my list handy otjerwise inwould point it out.