Capital gains tax…

My question relates to capital gains tax. We have 2 properties in Perth. One in an inner suburb 10 mins from beach and 2 mins to local deli, dentist etc and 5 mins to big shopping centre, which has been our main home. 

We bought land down south on a river canal with a public walkway in front, on a public jetty next to a boat ramp in 1999. We built a 2 storey house with 3 bedrooms upstairs, semi ensuite to 1 bedroom and access for the other 2 rooms (rooms are large double rooms). There is a lounge and a large balcony upstairs. Downstairs has a main bathroom with ensuite and a toilet in the laundry. The view is spectacular as you look up the canals, and one side of the house is north facing the other side is a parapet wall (double brick on both sides). 

My hubby has retired and is 62 and we are not sure what to do as he didn’t have much in super due to one thing and another. The house down south has never been used as a rental and no claims for tax deductions made. I am 55 this year. 

If we sell the house down south, how much tax would we be up for if the initial cost was roughly $80,000 for land and about $250,000 for the house by the time we have added part of the verge $30,000 to the bill. Plus trying to finish the house means an additional $40,000, so all up it’s about $400,000 while the recent real estate valuation came in at $1,200,000. 

Can we live in the house down south as a main home, but if we find we don’t like it after a year will this reduce the tax or would we have to live there longer or shorter. Can you give us any ideas as I am finding it hard to find info about this tax and the rules that apply.

Thank you

Coral

You can live in the second house down south and deem that as your primary residence but it will be pro-ratared for the time it’s an investment property and the time it’s a primary residence for capital gains tax purposes.

If you sold it today the estimated capital gains tax would be around $160,000. As you have held it for more than 12 months you will receive a 50% exemption so the capital gain of $800,000 is reduced to $400,000 at a tax rate of 40% (I have used 40% since I am unaware of what your current marginal tax rate is).

Regards

Edward Chan

Improvements…

I Just settled on my second rental on 28 feb 08 and it was trashed by the vendors outgoing tenant and discussions before settlement with the vendor were take or leave your purchase deposit.

Over the last few weeks I have now filled the holes in the walls painted throughout and fixed the plumbing and replaced the whole kitchen completely including the floor and upgraded the power to include safety switches and circuit breakers and a replaced broken window, 3 new doors and  new carpet and some fittings. approx $25,000

How do I treat these repairs for tax purposes it was uninhabitable when I settled on the property and my rental agent was initially horrified with the state of the place when she did her initial appraisal. but it is now quite nice.

Its on the rental market now.

Regards

Roger

Any improvements to the house, especially immediately after purchase, will be seen by the ATO as an improvement to the original purchase. They will argue that you bought it at a discount due to the state of disrepair and any costs to renovate would simply be to bring it back to market conditions and it would have cost you $25,000 more in the purchase price.

As Capital improvement you are still entitled to depreciate the renovations over a period of time so you will get it back but over a longer period of time.

Regards

Edward Chan

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What should I do next?
Situation: tenant caused $11,000 of damage to our property.
Insurance company wants us to pay $5000 upfront to start repair.
To repair and secure the house for rent will cost another $10,000 to $20,000.
Squatters broke into the house after the tenant moved out.
I am concered that I am throwing good money at a bad property.
The neighbours are all very nice families and people.
The house is on a good street close to schools, shopping centres and public transport but dated.
Should I demolish the property and wait until I have encough money to build a new house on the block?
 
You’ve had bad luck haven’t you? I can give you specific advice, but I would like to make some general comments:

Firstly why is the insurance company not reinstating your building? Isn’t that what you have insured for- or have you underinsured.

It will cost a lot more to demolish and build a new house and your mortgagee may not be happy letting you demolish the property. They may lower your Loan to Value Ratio for vacant land that does not have an income.

I obviously don’t know the sums, but if your property is in a good area, it may be wise to renovate the property which will be much cheaper than building a  new property and show bring in good rent as tenants will pay a premium for a renovated property.

Regards

Michael Yardney

Seeking answers on cycles…

Thank you so much for your excellent e-magazine.

I am reading an article by Tim Lawless from RP Data (Your Investment Property magazine June 2008 issue page 36) and he writes that Sydney has missed its growth cycle and the property clock is now pointing at 3 pm - MARKET DOWNTURN.

How can this be possible ?

After having read Kieran Trass' book about cycles (as per your recommendation in your excellent 'How to grow a multi-million dollar portfolio in your spare time'), it seems to me that interest rates have merely deleyed the Sydney boom as they are a market influencer, not driver. Would you concur ?

Thank you for being my mentor.
Regards, Irene

Thanks for the question Irene. I think what Tim Lawless is suggesting is that while the other east coast property markets boomed for much of 2006/2007; the Sydney property prices remained flat. So in essence they missed that last little property boom.

Property cycles vary from state to state. While all states are subject to the same macro economic factors that effect the global economy and Australia as a whole, each state’s own specific micro economic factors will dictate how their local property market behave.

Coming out of the last property boom in late 2003, Sydney had a poor state economy, a surplus of properties on the market and comparatively very high property prices.

What really held back the last Sydney property cycle was not interest rates as you suggest but New South Whale's poorly performing economy.

However I do agree with you that all this has done is delayed Sydney's next Boom. This means that when the Sydney property market eventually turns, and has started to in some regions, it will enjoy high growth to make up for this long flat period. This does not mean that all property will increase in value equally; property cycles usually start from the inner, more affluent suburbs and move outward.

Regards

Michael Yardney

Buy in the USA?

How does an Australian Investor go about buying an investment property in the US? All the media articles suggest it would be a buyer's market towards the end of the year.

Looking forward to receiving this advice.
Thanks,
Geoff

Thanks for your question Geoff. I would be very cautious about buying properties in the United States. I've seen many Australian investors get burnt and lose large sums of money investing in the United States when they thought they were buying into a buyers market as you are suggesting.

Firstly, our research suggests that it will probably not be a buyer’s market towards the end of the year and the United States has at least another 12-18 months before its subprime crisis plays out. Then it will take a long time for confidence to return.

Secondly, buying properties overseas is very different than buying properties locally. Apart from different tax rules, you are also speculating on currency fluctuations. More importantly though, how will you know where to buy in the United States? Cheap properties are often cheap for a reason.

I think there are much better opportunities available in Australia.

Regards

Michael Yardney

To move or not to move?

We currently live in Blackburn South, Vic and have done so for the past 8 Years. We have noticed some great growth within that time and currently have equity of $360k approx.

We are looking to either move to Mount Waverley Secondary School zone or rent a property due to the fact that we wish to have our children attend the school in the area.

Our dilemma is whether to rent our existing property and keep the already high gains or do we rent in the new area and use the equity from the sale of our Blackburn South property to invest in numerous properties, elsewhere?

Kind Regards,

Chris & Sue

Chris and Sue thank you for your question. What you are asking is for specific financial advice for your circumstances and I can't really give that.

What I can give you is a general comment that it makes sense to keep your residence as an investment rather than sell it. I agree that Blackburn South is a great area. Having said that, you need specific tax advice as to how to convert your principle place of residence to an investment property -tax effectively.

I also agree that sending your children to Mt Waverly Secondary College is a wise decision. Properties that fall within the Mt Waverly Secondary school-zone have out performed in the long term because like you, many other parents want to send their children to that school. You could do a lot worse than buying a home in that area, because you will achieve good amenity as well as strong capital growth in the long term.

Regards

Michael Yardney

Development dilemmas…

We are looking at demolishing our existing home in Shepparton (Rural Vic) which overlooks the river, and build two side by side double story townhouses.  One for ourselves to live in, and sell the other off the plan (we have someone already very keen to buy it).
 
Current value of the cleared land would be approx $300,000. To build our townhouse will be approx $330,000 and the other we will sell, will be approx $300,000.
 
Plus architect fees, legals, permits etc.
 
My question is…how do we determine a realistic and fair price for the townhouse we wish to sell ?
Barry

Thanks for the email.  We don’t work in regional areas.

The only way to determine the end value of your properties is what the market would pay today for comparable properties.

The end values have nothing to do with what the development costs would be or what you would like to achieve.

That’s why many development projects are not financially viable today.

Regards

Michael Yardney

Seeking better service…

I have recently bought an investment property in SA, but Iam not happy with the service of the appointed property manager. Even though I signed a 12 month agreement with her, can I change to a different company?

Tony

We have checked with the REISA and have been advised……

The owner of the property has signed a binding contract however, if they are not satisfied with the service and want to change to another agent, they will be liable to pay the fees up to the expiration of the contract to the current agent.   

Some agents are willing to pay that fee as an incentive for a landlord to change agents.  Unlike Victoria where a leasing/management agreement is usually a 60 day contract, leasing/management agreements in South Australia can extend to a 2 year contract.

Regards

Pamela Yardney

Feeling the pinch…

I’m only a small investor but am currently going through a time of doubt and am wondering when the market will start to turn as I’m at the edge of my buffer in which I have set myself where I need to re-assess my situation.

I can probably hold out for another year, I live and have an investment property in Wollongong (Sydney south) and another in rural NSW.

Things have not moved in a number of years already and when they do I’m wondering how soon the financier’s are willing to re-lend based on asset.

Any insight and recommendations would be appreciated.

Yours truly

Rob

I will leave Michael to comment back the state of the property market in NSW but suffice to say, it’s not dead, just asleep. Therefore, if you hold good quality assets then hang in there.

In regard to lenders willing to lend, you can revalue anytime. If valuations have increased then you should be able to access and use the equity (subject to approval of course). If the market picks up it can generally move quickly.

Valuers don’t jump on the bandwagon immediately so normally you have to wait 6 to 12 months for a sufficient amount of sales to occur (so the value has enough comparable sales evidence to support a higher valuation).

My advice is to keep a close watch on the market and keep note of properties similar to yours that go up for sale (and note final sales price). You can use this information when you approach the lender to re-value your property/s.

Regards

Stuart Wemyss

Director – ProSolution Mortgage Brokers www.prosolution.com.au

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1.      Which way are the property markets heading?

2.      Which way are you heading?

3.      Are they both in the same direction?

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