Look beyond the obvious when calculating tax deductions
Tax deductions can be concealed behind walls, in ceilings, under floors and on roofs – the combined value of which can...
Here are some vital considerations for property investors to minimise costs and maximise gains when splitting single-occupancy homes into two or more private dwellings.
From owner-occupiers with extra land space looking to profit from leasing a new sub-division on their land; to property investors looking to increase their yield before making a big sell – it can be a smart option splitting single-occupancy properties into two or more private dwellings.
Sydney based property investor, Sharon Barkhurst, said to Smart Property Investment: “We basically split our tri-story property into two dwellings by constructing a wall where a doorway used to be.
“Because my husband did all the renovations, it only cost about $10,000 and I imagine added at least $400,000 to the value of the property as a whole.”
Ms Barkshurst noted that she was receiving $1,500 per week in rental income from the single-occupancy dwelling – and is now receiving $1,850 from the dual-occupancy set up.
But the process involved in splitting property is rarely a yellow brick road. There are many considerations and restrictions that need to be considered at the feasibility stage before the land of gains can be reached.
In most cases, splitting single-occupancy homes into two or more private dwellings will require both a planning permit and building permit to go ahead.
Jason Cornwall-Jones, award-winning real estate partner at law firm Ashurst, said that splitting properties without the required permits is often an offence, can adversely affect insurance coverage, and may result in the relevant authority ordering an offending building to be demolished.
Mr. Cornwall-Jones noted that the process of subdividing property generally involves:
“If the subdivision is for three or more lots, some councils (particularly in Victoria) may impose an ‘open space’ levy, which can require the developer to contribute to council up to five per cent of the value of the land as a condition of subdivision,” said Mr Cornwall Jones.
According to Mr Cornwall-Jones, the practical considerations for splitting single-occupancy homes into two or more private dwellings include:
Many investors fail to take into consideration the tax implications and restrictions associated with splitting property.
Mark Chapman, director of tax communications at H&R Block, said investors who fail to properly account for the tax consequences in their tax return can lead to ATO audits, underpaid taxes, interests and penalties.
Mr. Chapman noted some outstanding taxation considerations for investors who split their property include:
“The CGT issue is a real ‘sleeper’ that may not become apparent for many years (until they sell the property), so it can be easy to overlook,” said Mr Chapman.
“The key for clients thinking of doing this is to get detailed tax and legal advice before they undertake any work so they are aware of any tax consequences, before they have committed to anything. Ongoing tax advice is also essential to ensure that they correctly disclose income and claim all the deductions they are entitled to (and don’t claim any deductions they are not entitled to).”