To build or not to build? Advice for retiring parents Preston VIC

Hi, hoping for some advice for my parents looking to develop property in Preston VIC.

Quick background: Parents nearing retirement age and have negligible super/cash but also negligible debt. Dad inherited 50% of his mother's house/land in Preston VIC and purchased the remaining 50% from his sister (in year 2000) who had no interest in retaining ownership.
Total value at time of purchase was approx. $200k for the 800m2 land + 1970's built 2br house (so Dad paid $100k).

Fast forward to now, the old weatherboard house on the property is dilapidated and can no longer be leased without major repairs. I would guess the current market value to be approx $600-800k (basically land value only).

Parents are not educated about property development (neither am I...) and have been given two options.

Option A, just sell the property 'as is' and dump the profits into super to minimise tax (they are leaning towards this option).

Option B, a property developer has quoted approx. $1.1mil to demolish current house and build 3 x 2 storey townhouses. Some or all of these would be sold upon completion.

Initially, we discussed a plan in which I would buy one of the completed townhouses to live in (I currently rent/work in oh so affordable Melbourne...) but our accountant hasn't been able to suggest a viable arrangement. Hence the folks leaning towards just selling it off and avoiding the headache.

Does anyone have any advice as to the best course of action that might yield a mutually beneficial outcome? I.e. minimising tax, maximising yield and allowing me the option to buy one of the finished properties?

Any advice or experiences will be much appreciated.

Thanks in advance, Barry

 

Need to do a feasibility on the options. Some of the major variables:

Development Costs
Land: $800,000
Construction and demolition: $1,100,000 (assumption as per builder's comments)
DA/CC fees:
Professional Fees:
Interest:
Marketing:
Contingency:

Profit
Sales:
TH 1:
TH 2:
TH 3:


Basically there needs to be a healthy margin from gross profits less total development costs. Somewhere say between 25-35%. If there is no margin to be made then its most likely better to just sell as is. Basically you need to fill in those variables to work out whether it's worthwhile to build or not. Whether or not you actually have the capacity to develop them is a separate story.

 

It may suit the parent to do AS LITTLE as possible and sell to a developer. This would avoid the land sale bring subject to GST. The property doesnt now meet the definition of residential premises with attached land. By doing very little, then your father is likely to be liable for anything more than some (discounted) CGT. If they get involved in developing they would be subject to GST and also face full income tax in many cases.

The purchase issue is really unrelated. However, if they surrender their rights in exchange for you receiving a villa/unit they may have a serious issue with loss of Centrelink pension benefits for 5 years. This could also affect things like future age care too. The value of the unit would be treated as them gifting you money.

There could also be benefits of splitting the value after selling so both mum and dad earn interest etc as putting it all in one name may complicate assets and income tests. and inflate the tax if it is all in one name. Super may or may not be a strategy. Depends on a number of factors. This will dovetail with the assets and income tests and obtaining a part pension or even a full pension should be explored as it may preserve some of their funds. Our aged care advisers often encounter people who blindly DIY and lose benefits they could have accessed. Even how you complete a pension application is important.

I would seek personal tax and licensed financial advice from someone who also offers aged care planning advice

 

I’d sell to a developer. If you all have no idea about development, you’d be mad to take on such a project.

 

Thanks all for your replies. Selling the property as is looks like the right way to go.

I guess what I really want to know is if my parents WERE to decide to develop the property with a view to me (son) keeping one to live in, what is the most tax efficient method for achieving this?

Can my parents "gift" me the property and we create a private contract for me to pay them back? They are unlikely to receive pension payments so I would assume the limits on one-off gifts do not apply in this case?

I imagine the scenario as such:
Unit 1 - sell
Unit 2 - rent/sell
Unit 3 - sell/gift to me to be paid back at agreed interest rate with bank of mum/dad.

Assuming this hypothetical scenario is viable i.e. profitable enough to be managed financially, what taxes would we be liable for?

It has already been established that just selling the land and dumping profit into super is the best way to go from a tax minimisation perspective for my parents. I just want to compare the two scenarios.

I may be on the conservative side when it comes to investing but I am concerned about potential issues in the Australian economy. My parents, not so much... A period of high inflation could evaporate some of the profit from their sale and how safe is your money in super anyway? Ask retirees now on reverse mortgages because their super was cut in half in the GFC...Am I wrong to have these concerns? Every day we seem to be sailing closer and closer to catastrophe.

 

Then why are you persisting in trying to pull off some weird arrangement for your development?

You said you don't have experience in property development. Developing for profit is hard enough without complex family arrangements to get in the way. And you seem willing to risk not only your financial position, but your parents as well.

 

After seeking financial & legal advice get a valuation (from a valuer) and market appraisal (from an agent) before chatting to any developers.

 

I often find many of these great ideas are initiated by kids without land, wealth or sufficient $ v's their parents who have land and wealth. However well intentioned kids (looking for a way to get into property) often have no idea about how they may harm their parents who struggle to say no or who are led to believe profits will result. I have only once read a post by a parent wanting to gift property to a child but read and heard many budding developers discuss parents "maybe"gifting property to them. I'm always quite concerned for parents in such a case and especially so when they have a poor grasp of language to fathom the risks and impacts on them financially.

Gifting property is dutiable and triggers CGT for parents. And may affect wills or impact family estate planning etc. Then the GST and also (full) income tax (if a profit occurs). Its harder than ever to pull a profit from a small dev.

 

If it was a gift then how could you contract to pay them back. You could buy a property off them though, perhaps an instalment contract.
But just because you can doesn't mean you should!

THEY should get legal advice.