Tax Effect on subdivided property

Yes the mortgage must be discharged because new titles will be produced. The bank will want to revalue each title and make sure LVRs are ok and then agree to release and place new mortgages. But you should really consider apportioning the loans at the same time because it will be additional work down the track and may involve new valuations too.

 

Thanks Terry, can I just confirm what you mean by apportioning the loans though?

Some values may help.
My Loan - 280
Brother - 180
Subdivision Split - 40

Estimates Values
Front Dwelling - 580
Rear Land - 280

So total loan is 500k, estimate new values 860k = 58% LVR

 

You will have to tie in current balances with the new titles and the construction.

Remember you can only claim interest on loans associated with the purchase or construction etc of an investment property.

So if you buy a property for $400,000 using a loan of $300,000 if you split the property into 2 portions each valued at $300,000 each you cannot simply say the existing loan of $300,000 relates to split A because it doesn't. It won't be half either as the land won't be split 50/50 and there is a building on one portion.

 

Thanks Terry
I think I am starting to understand.
I am not concerned about deductibility though because I am purchasing the land to construct my PPOR. Understand the ideal situation is to keep the loan high in case it ever turns into an IP but there is no plan to move for 10 years and I'm more a believer in assessing other options as opposed to holding regardless if I wanted to move.

 

You should be concerned because if you have the wrong splits and then sell a property or live in a property you will be claiming the wrong amount of interest - more or less.

 

I guess this is outside my realm of understanding for now. Perhaps park this discussion for another year .

I'm getting confused as to why "claiming interest" is a concern. At the end of the transaction my brother will have nothing but cash left over. I'll have a vacant block of land to construct on. I will not have an IP nor plan on having one as a result of this transaction.
So just not sure what I am "claiming".

 

oh, if there is no investment portion then nothing to worry about - unless the places are later rented out.

 

We have a rental property bought a few years ago on a retain and sub-dividable block. Sub dividing is not the original intention as we didn't know it is dividable when we bought. Always a rental so far.

Thinking of 1. sub dividing the lot 2. improving the old house 3. sell the old house 4. build a new house and rent out or live or sell.

Question 1 : We have a LOC on the property which can be used to subdivide. Loan+LOC can be against both properties but we have serviceability issues. When the subdivision occurs, will the bank assess borrowing capacity?

Question 2: What are the tax implications of selling the new build as soon as it is completed or living in that house for an year or two and then selling?

 

Q1. Not usually if there is no additional borrowings.

Q2. Complex.

 

Thanks Terry. I understand that I should get tax advice here. But how complex is it?

As there won't be much loan on the new build, renting out is not really a good option. Selling straightaway could mean no CGT discounts?

If we live there for a while, we may not have to pay CGT for any gains after we move into it?

 

Its always complex and different and ALL factors must be considered. I believe my role when advising developers etc is to advise in a way that breaks it down and simplifies so that YOU understand all the issues. I know them. If you don't you cant work out profit and will possibly under or over pay tax. Both are equally bad.

We identify the planning strategies that can reduce taxes. Legally. ie If you build and sell GST will apply BUT.... The GST may be able to be halved if you get the right advice. And if GST is involved your accounting records need to catch all the GST you pay. You can claim it back - Increasing profit. Subdivision itself is not a big tax issue but may affect valuations and other issues downstream. Its the intentions before that, the future intentions and more. Even how you account for costs.

I regularly give this advice and it must address your intentions, changed intentions, what you do to the property, GST, CGT, Ordinary Income, Stamp Duty and even ownership. Ideally all this advice should be before you acquire then finalised when you do.

 

It would be on a % basis as it wasn't your main residence since purchase.