The house flipper's guide to getting your tax house in order.
Recent figures released by the Australian Bureau of Statistics suggest that a record-breaking $18 billion was spent on renovations in the quarter up to September 2016. Whereas the bulk of this spend would previously have been attributed to private renovation, this notably high figure is undoubtedly inflated by ‘house flipping’, a process whereby individuals buy a property, renovate it and sell it on for a tidy profit before repeating.
Programs such as The Block might make house flipping seem straightforward and lucrative, but there are also a number of tax issues that house flippers should be made aware of.
Understanding capital gains tax on property
“In most cases,” says Mark Chapman, Tax Communications Director at H&R Block Tax Accountants, “the profits arising from house flipping would be subject to Capital Gains Tax (CGT). You’ll make a capital gain where the capital proceeds on the sale exceed the cost base of the asset. If proceeds are less than the cost base, you’ll make a capital loss, which can generally only be offset against other capital gains of the current year or future years."
The good news is that if you make a capital gain and have owned the property for more than 12 months, you can take advantage of the CGT discount to reduce your capital gain by 50%. The bad news is that if you’ve owned the property for less than 12 months before selling it, you’ll pay CGT at your full rate of tax.
“A better option might be to move into the house and live there whilst the renovations take place,” says Chapman.
“Doing that should mean that you would be eligible for the CGT main residence exemption, meaning the profit on the sale should be CGT free. The downside is that because the property you are renovating would be your own residence, you wouldn’t get any tax relief for the renovation costs or for the borrowing costs.”
If you have multiple properties under development at the same time, you might be treated as if you have a business of renovating properties. In this case, you’ll be subject to income tax rather than CGT. You’ll need to bring into account the proceeds of each sale but you’ll be able to offset the renovation costs, the cost of borrowings plus all the other “costs of business” you incur. Should you make a loss, you’ll typically be able to offset that loss against any other income or gains in the year.
Stamp duty differences between states
Another important consideration is Stamp Duty. “Every state has different rules around stamp duty,” says Chapman, “but one thing you can rely on is that every time you purchase a house, you’ll need to budget to spend thousands of dollars settling the stamp duty liability and the more you flip, the more often you’ll pay.
"In Victoria, for instance, Stamp Duty on purchasing a $500,000 house will leave you around $25,000 out of pocket (or slightly less if you live in the house as your place of residence), a cost that can easily eat into your profit margins. However, it should also be noted that you’ll get earn some financial relief by adding this cost to your CGT cost base.”
See also:
Is the government considering changes to capital gains tax for investors, or not?