Author Topic: Australian investment property case study  (Read 269 times)

Murdoch

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Australian investment property case study
« on: September 28, 2020, 03:29:25 PM »
Hi all,

We are considering buying a house in a town we will move to in a few years and I had a few questions I am hoping the experienced heads on here can help answer please.

Cost $600k.
Loan $400k at approx 3% (hoping lower, but using this number for now).
Rented at $430/week. Current tenants long term.

The house is fine as is but not what we want long term. The location is right though, so we are mainly buying the land.
The intention is to buy it now and in approx 18 months start a complete rebuild.
We would aim to tax deduct the cost of the planning, approvals, and build of the new property over the following couple years.

Questions:
If the house is in both mine and DW name, can I tax deduct the costs against my income (she has passive income but it is minimal so tax burden is very low)?
Whilst it is an investment property am I right to assume I can tax deduct costs such as landscaping, approvals costs for renovation or rebuild, and eventual build costs?
What pitfalls are then in this plan?

Thanks in advance.
Murdoch.

deborah

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Re: Australian investment property case study
« Reply #1 on: September 28, 2020, 05:03:29 PM »
Deductible costs are for maintenance only. Anything that increases the value is not deductible, so none of the costs you mention are deductible UNLESS the landscaping is a renewal rather than new.

Murdoch

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Re: Australian investment property case study
« Reply #2 on: September 28, 2020, 07:50:59 PM »
Thanks Deborah,

What if I remove the old building and rebuild from scratch?
Would that make the new building tax deductible?

Cheers
Marlow

deborah

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Re: Australian investment property case study
« Reply #3 on: September 28, 2020, 08:46:53 PM »
With any investment, there are two forms of tax.

While you are earning income from the investment, you pay tax on the income, and any reasonable money spent earning that income is a tax deduction (even if it is more than you earn). This includes the interest (not principle) on the mortgage and any maintenance costs.

When you sell an investment you pay tax on the appreciation of that investment. If you increase the value of the investment, by renovating it... the increase in value of the investment is not taxed. So if you bought a property for $500k, and sold it for $600k after you'd owned it for a while, you'd pay tax on the capital gain of $100k.

If you didn't sell it, but at that point got it valued at $600k, then demolished the house and built a new one for $200k, and the new valuation came in at $700k, then you sold it a few years later for $800k, you'd pay tax on the capital gain of $100k + $100k = $200k because you could show that you'd added $100k of value to the investment.

A lot of people find the difference between these very confusing. If the hot water service blows, the replacement of the hot water service is clearly maintenance except if you decide to replace the old small hot water service with a new much bigger hot water service - which is actually an increase in value of the property.

Murdoch

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Re: Australian investment property case study
« Reply #4 on: October 04, 2020, 08:54:01 PM »
Thanks Deborah,

I'm still a bit confused sorry.
If we knock down the current house and build new is the cost of the build able to be tax offset against capital gains.

Cost $600k
Demolish and rebuild $250k
Sell house fo $850k (>12 months after purchase)
In this scenario do we pay capital gains, or as the cost of rebuild equals the added value at sale is it offset?

Sorry, I do find this stuff a bit difficult.
Cheers
Murdoch

deborah

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Re: Australian investment property case study
« Reply #5 on: October 05, 2020, 01:27:36 AM »
Your example misses the point.
Scenario 1.
Purchase price - $600k
Valuation immediately before renting - $700k
Sell immediately after renting - $800k

You have a capital gain of $100k

You could have knocked it down and rebuilt between purchasing and renting, and youíd still have a capital gain of $100k. It doesnít matter how much the new house cost. However, if you rented it immediately after you purchased it, and sold it while it was still being rented, the ATO may query the valuation.

Scenario 2.
Purchase price - $600k
Valuation immediately before renting - $700k
Valuation immediately after renting - $800k
Knockdown rebuild, sell house in the future

When you sell the house, you have a capital gain of $100k.

The capital gain is over the time you are using it as an investment. You can also only reduce your tax with your maintenance costs while itís being used as an investment. This can be tricky if you have a holiday house, because you probably wonít be renting it out full time, and if youíre maintaining it at times that youíre not renting it out, you canít claim the maintenance.