Option to sell subdivided land or build a unit and sell the original house

Question

Hi

I am on a 140k per year income.My wife is a house carer who works part time earning arounf 4k to 5k per year. We have one daughter. I have a property in craigieburn for which was my own home purchased in sept 2007. I move to tassie and it was converted to investment property in Jan 2009.
since then i have got a dual occupancy permit to build a 3 bed unit on the back and am in process of subdividing the block. I want to sell either the original house, and build the new unit and keep it
or
sell the land on the back with plans and keep the original house.

Question: I whant to know which option is worth for me considering the tax benefit, capital gains etc.

some Information

Purchase Price $226,500
Land Price $120,000
Total Land area 645m2

Subdivided Land 216
Ratio of Two blocks 0.33
Cost of subdividing $18,300
Mortgage Insurance Premium $4,480
Total Stamp duty and other legal charges paid $10,053
Conveyancer Fee $578
Loan application fee+Out of pocket cost(lender) 104.5
Bond fee $255

Cost to build new unit on back 165,000

cost to fix exisiting house for selling 5k
Selling info

selling price of exisiting house 300,000
Selling price of subdivided land 140,000
Selling price of new build unit 310,000

Answer


It is not so much a question as to which will make you the most profit or least tax on sale it is more a question of which is the better investment return verses the price you could now sell them for. You need an accountant to go through the numbers with you just as if you were considering purchasing either of these investments and see which one stacks up the best to hold. In this I mean comparing keeping the unit and sell the house or vice versa.
As for the question of whether to just sell off the vacant land. This would be verses building the unit and keeping it. I doubt whether building the units and selling them off would work out to be the best option because you would have to charge GST on the sale which is a considerable drain on your profit and it doesn’t look like there will really be much of a gain in value over the value of the vacant land for putting the unit up. Again it is worth doing the numbers but that is beyond the scope of this service.
So first decide whether the house or the unit is a better rental. If it is the house then you may as well just sell off the vacant land unless the numbers on building and selling and paying GST stack up. Note this calculation should take into account your tax refund as the unit would have a better depreciation claim than the house. On the other hand if the unit stacks up as a better rental return on investment than the house then you need to check that the development is going to produce assets worth more than their input costs, more number crunching.
An important consideration in the which to sell decision is CGT, considering your high tax rate. It would be worth checking with the stamp duty office in the state the property is in to see what their concessions are for transfers between husband and wife. In some states I believe it is free providing the transferrer retains some ownership say 1%.
A strategy to maximise the use of the main residence exemption could be to sell the whole property to your wife and cover it completely with your main residence exemption up to that date. This would mean that any property you own in Tassie would not be covered during that time. The market value that you can transfer to your wife at can take into account all the potential of the property as the higher the better, more of the gain tax free. She could then go ahead with the development and the profits would be in her lower tax bracket.
Of course the counter here is the unit would be in her name so negative gearing would not be beneficial. Again the numbers need to be crunched as to whether the property is positive or negative.

If you read our how not to be a developer booklet in the freebies section of our web site you will get a lot more detail on the issues but ultimately you need to do the numbers with an accountant.

Sorry not so much an answer but really a home work list and lots of topics to discuss in detail with your accountant!

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