Tax on subdivision

[b_z]

Hello everyone
I bought a rental property 3-4 years ago for $400K with a mortgage of $350k. The rental was boughtwith a intention of long term investment. The rental has been run on a loss forlast three years. My partner changed her job to part-time last year and thismade me feel less comfortable to hold this rental. My rental siting on a largesection which is subdividable. I thought if I subdivide the land and sale thenew section off which can bring me a reasonable amount of cash in to reduce mymortgage to somewhere around $230k, after that the rental will start to make aprofit. I started the subdividision process later last year and I’ve got anoffer for the section on hand now.
Before I start the subdivision I consulted my accountantabout my tax position about subdivision and sale of new section, he told methat the income from sale of land is not taxable as it is used for reduce mydebt.
Does everyone agree with my accountant? If you don’t, can you please tell me what I can do to minimise my tax bill?
(the remaining value of the property is around $350k, I believe)
Thanks you very much for your advise
b_z

[TheLiberalLeft]

I'm no accountant, firstly, but I fail to understand why the use of the sale proceeds (to pay off debt) has to do with whether it's taxable or not. They are 2 discreet transactions.

I mean, I pay off debt with my salary, but that's taxed.

Still I'd say it's not taxable, but for reasons that your original intention was to hold long term.

[Eugene]

Be very very careful, the last think you want is to be deemed a developer and thus have gains on future sales of buy and holds taxed. As I understand it, traders can avoid tax on gain on sale by holding income properties for more than 10 years, but developers are always taxed on any sale, also they are developers for life. I am about to seek advice on this very matter. Recommendations anyone? I agree with TLL, I can't see how the use of the sale proceeds can have any effect on whether or not there is any tax payable on sale.

[Rosco]

Be very very careful, the last think you want is to be deemed a developer and thus have gains on future sales of buy and holds taxed. As I understand it, traders can avoid tax on gain on sale by holding income properties for more than 10 years, but developers are always taxed on any sale, also they are developers for life. I am about to seek advice on this very matter. Recommendations anyone? I agree with TLL, I can't see how the use of the sale proceeds can have any effect on whether or not there is any tax payable on sale.

Yes, be very careful.

Tax on subdivision can be quite tricky and often depends on the exact circumstances. Therefore I'm not going to give specific advice but I will make a few general points.

- even if the one subdivision is taxable, it doesn't necessarily taint you as a developer. Generally you would need to do more than one simple, one section subdivision to be tainted. It depends on what else you have done, and what else you do in the near future.

- first thing - if purchased with intention to subdivide and sell will be taxable.
- second there is quite a few exemptions such as for subdivisions of a minor nature (actually quite hard to fit this category), if subdivide then rent out etc. So if you subdivided, built a rental, rented out for a reasonable period, then sold, any profit would be tax free unless otherwise tainted.

- if the subdivision is taxable, there is ways to legally reduce the profit.

Ross

[b_z]

Thanks TLL/Eugene/Ross. I appriciate all of your suggestions. It looks like my accountant has given me a wrong direction on this.

[Wayne]

Time for a new accountant - seems like a pretty basic mistake.