Any tax implications on subdividing & selling rental property??

[Pegasus]

Hi there, Im looking for some advice re the tax implications of subdividing and selling a rental property. We have our main business as property traders which we have set up correctly to pay tax and gst. We recently started buying rentals which we have done thru our separate rental entity. Right now we understand that as traders we have to keep these rental properties for minimum 10 years to avoid captial gains tax or gst.

My question is related to a property we have bought with 2 houses on it as a long term rental in the rental entity. we have consent to subdivide this into 2 separate titles. If we do that and sell one of them now but keep the other one as the long term hold, is that an issue tax wise. Essentially we have a mortgage over the property which would reduce as we sold down one of them, but we would not be making a profit as we are keeping one, but with a low mortgage. Are there any implications of this that i should be aware of?
many thnks
Pegasus

[Winston001]

You could be regarded as a developer and thus be liable for GST and tax on the profit.

And you will have a profit. It gets swallowed up by the bank in reducing the mortgage but it exists and can be calculated.

Talk to your accountant who knows your situation.

[sbw]

I think you are missing a couple of points here:
1) there is currently no capital gains tax (and in my opinion very unlikely according to current polls that labour will get into government)
2) you talk about subdividing and selling a property and using the money to reduce your current mortgage (on the other property). If you are using the profits from the sale to reduce the entities debt and although you won't get any cash in the hand BUT you will still me making a profit (or loss) which is realised. Therefore it will be taxable in the entity you do the subdivision in.
3) it also depends on your intention... which in this case it would be hard to argue that it is other than to make a profit. so again it will be taxable.

Talk to an accountant regarding the specifics

[Rosco]

When did you buy the property?
Association rules changed around 2 years ago, so if purchased before this then might not be tainted.
If purchased after association rules, most likely is tainted, therefore if you sell within 10 years, then proceeds will be taxable due to your association with developer.

Also depending on the subdivision the gains could be taxable anyway

Ross

[Pegasus]

Ross, we bought it this year and plan to subdivide sell one property and keep the other for longer than 10 years. Would there be tax implications do you know in this case? It is a property with two existing dwellings which will be split into 2 titles and we will sell one of them, keeping the other.
Many thanks
Pegasus

[Rosco]

You will most likely be tainted so any gain will be taxable. You could check if your hold entity is tainted with your accountant, but just about certain it will be.

Is there a gain or profit? Sometimes you can use valuations to your advantage to show the cost of the one you are selling was higher, therefore less profit. Obviously costs (such as subdivision costs) would be taken of the sale price, before calculating profit.

Ross

[Rosco]

Also do you really need to sell one?

You need to look at the costs and benefits. Obviously if you can keep both for 10 years, then no tax!

Ross