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  • Conversion of Use of Property from Office to Residential

    Hi guys, I think I know the answer to this but...

    I have some office space I want to build 2 apartments in.

    If I do this, I will have to change the use from commercial to residential.

    And along with that comes a tax bill right? 15% of the value I think.

    So if it was worth circa $400k, then I owe the IRD circa $60k...

    And this is right at the start of the project... so circa $30k added onto the cost of each apartment!

    Is this correct?
    Last edited by Davo36; 03-04-2019, 09:38 AM.
    Squadly dinky do!

  • #2
    Originally posted by Davo36 View Post
    Hi guys, I think I know the answer to this but...

    I have some office space I want to build 2 apartments in.

    If I do this, I will have to change the use from commercial to residential.

    And along with that comes a tax bill right? 15% of the value I think.

    ..................................................

    Is this correct?
    sorry? why the tax bill?

    Comment


    • #3
      Hi,

      In general you would have to repay GST based on the market value of the property now, so your example if worth $400k + GST then have to repay $60k of GST.

      BUT there are some exemptions around this and in some cases can repay GST based on cost, so worth talking to a property accountant about.

      Ross
      Book a free chat here
      Ross Barnett - Property Accountant

      Comment


      • #4
        Originally posted by John the builder View Post
        sorry? why the tax bill?
        See Ross' comment.

        Not many people know about this.

        But essentially when I bought the building it was sold as $x + GST. As a GST registered owner, and because it's a commercial property, I claimed the GST back.

        Now that I'm changing the use to residential, the IRD want that GST I claimed back. You understand?
        Squadly dinky do!

        Comment


        • #5
          Originally posted by Davo36 View Post
          See Ross' comment.

          Not many people know about this.

          But essentially when I bought the building it was sold as $x + GST. As a GST registered owner, and because it's a commercial property, I claimed the GST back.

          Now that I'm changing the use to residential, the IRD want that GST I claimed back. You understand?

          ok its a GST issue i get that.

          but why not retain this for residential use?

          Comment


          • #6
            Originally posted by John the builder View Post
            but why not retain this for residential use?
            I don't understand your question.
            Squadly dinky do!

            Comment


            • #7
              Originally posted by Davo36 View Post
              I don't understand your question.

              you claimed GST on the commercial purchase and would pay also when you sell. I get that.

              But if you develop for residential can this not also be GST applicable? Why do you need to do adjustment now?

              Comment


              • #8
                If going to change to long term hold residential, then that is not a GST activity.

                So need to do a change of use for GST purposes, as GST has effectively been claimed on a property that is going to be long term hold residential which isn't correct, hence the adjustment.

                Ross
                Book a free chat here
                Ross Barnett - Property Accountant

                Comment


                • #9
                  Are you going to unit title the apartments Davo?
                  Profiting from Property, not People

                  Want free help on taking your portfolio to the next level?

                  Comment


                  • #10
                    Probably. Why? Does that make a difference?

                    Getting some office enquiries though, so might just see if I can lease it as office space for a month or so and if not, then consider apartments more seriously.
                    Squadly dinky do!

                    Comment


                    • #11
                      How much do you reckon to create 2x75 sqm apartments inside a 150sqm space.

                      Existing building so no land, exterior wall or roofing costs.

                      But will have to pay a shit ton of stuff including:

                      Upgrade (replacement) to building fire alarm system?
                      Ripping out existing windows and putting in double glazing. Or possibly doing secondary glazing.
                      Bathrooms
                      Kitchens
                      Electrical
                      Light fittings, power points etc. Some sort of contribution to be paid for a new meter?
                      Interior walls and ceilings.
                      1x new water meter. Cost =$16k?
                      Floor coverings (tiles, carpet)
                      Curtains.
                      Wardrobe doors and shelves.
                      Heat pumps.
                      Resource consent fee
                      Plans for RC
                      Reports for RC (sound, drawings etc.)
                      Engineering reports (structural, sound, fire, mechanical ventilation etc.)
                      Fresh air systems (due to road noise - can't open windows for ventilation if > 60db)
                      Appliances (stove, hobs, range-hoods etc.)
                      Fire doors.
                      Planner fees.
                      Development contributions
                      Reserve contributions
                      Unit titling costs - surveyors, council, LINZ.
                      Changes to body corp structure? Addition of 1 more unit...
                      2x extra storage box areas in car park area. No room for these really.
                      Access control system would need upgrading - at least one more door needing a controller/mag lock.

                      And a bunch more crap that will crop up along the way.

                      Like is fire rating between retail downstairs and apartments upstairs required to be different from having retail downstairs and apartments above?
                      Enough power to building?
                      What about an extra fibre connection?
                      Last edited by Davo36; 08-04-2019, 06:06 PM.
                      Squadly dinky do!

                      Comment


                      • #12
                        how does a long term hold for residential differ from a long term hold for commercial. What am i missing?

                        Comment


                        • #13
                          Not many developers would pay that GST.

                          Usually you notice the higher level offices converted to unit titled apartments and resold while the lower commercial is retained for its income (easier to rent out and better capital appreciation). Is a good way to own prime road footage, pull out your profits after the redevelopment, which allows you to recycle your capital.

                          It might not work outbevaude is just two units but I would still do a feasibility study You want to get a friend architect to get the blueprints created then you can get the costs you mention. You want to also look at expected rental and sale price.

                          Unit titles will add more value and allow you the flexibility to sell 1 or both units while retaining the commercial income.
                          Profiting from Property, not People

                          Want free help on taking your portfolio to the next level?

                          Comment


                          • #14
                            Originally posted by John the builder View Post
                            how does a long term hold for residential differ from a long term hold for commercial. What am i missing?
                            Are you asking why I would convert to apartments?

                            2 reasons - 1) Easier to rent. Office space is always a bit tricky to lease. 2) If I sell them, 2 apartments are worth a lot more than 1 office suite, even taking the redevelopment costs into account.
                            Squadly dinky do!

                            Comment


                            • #15
                              Originally posted by DaveW View Post
                              Not many developers would pay that GST.

                              Usually you notice the higher level offices converted to unit titled apartments and resold while the lower commercial is retained for its income (easier to rent out and better capital appreciation). Is a good way to own prime road footage, pull out your profits after the redevelopment, which allows you to recycle your capital.

                              It might not work outbevaude is just two units but I would still do a feasibility study You want to get a friend architect to get the blueprints created then you can get the costs you mention. You want to also look at expected rental and sale price.

                              Unit titles will add more value and allow you the flexibility to sell 1 or both units while retaining the commercial income.
                              Yes some developers would get a friendly accountant to allow them not to pay that GST. But it's technically fraud. Also, I got asked by ASB once if that GST had been paid, I had to get a letter from my accountant saying so. I think they have been caught out by that in the past.

                              Yeah it would need quite a lot of looking into.
                              Squadly dinky do!

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