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Flipping houses can be a great way to make a living or a handy lump of cash quickly, however it involves
Flipping a property is buying at one price, then doing a strategic makeover to sell quickly for a higher price.
Buy-to-sell (BTS)
To some property flipping is trying to buy at a big discount to the market, to immediate sell for a profit, in some cases, the buying and selling can have a concurrent settlement, so no money, other than a deposit is used. Generally, however, some form of renovation of the property is part of the flipping process.
Buy-to-let (BTL)
Buying to let, can involve a renovation, to get an uplift in the valuation of the property, without selling, which can be used to: –
Profit Rule of Thumb
A good rule of thumb that many flippers use is a 20% return on investment (ROI) for all cash.
A quick example: – Using -Qld typical stamp duty and real estate agent commissions used
John and Mary looking to buy a property (diamond in the rough) in an up-and-coming area, which though structurally sound, is simply worn out.
Purchase Price $400,000 – Fully renovated homes, move-in ready, have a median price of $550,000
Renovation Budget is $30,000
Time for Flip – 3 months
Buying / Selling Cost around 5.5% ($550, 000@5.5%) = $30,250
Selling Price $550,000
Profit $89,750 ($550,000 – $400,000 – $30,000 – $30,250)
However, not everyone can pay cash, so typically will only contribute 20% of the purchase price and costs, in many cases secured against other properties as a line of credit (LOC).
# No account for your time, which you could have earned income elsewhere!
This would be the case of a homeowner, that intended to treat the property as their principal place of residence, moved in on settlement, completed a quick renovation, and then, for various reasons had to sell unknowingly at the time of purchase. In these circumstances though the appearance of a flip, any gains would most likely be exempt under the main residence CGT exemption.
An individual or group may buy an investment property, and do an initial renovation to get a higher rent, with the intention to rent the property as a long-term investment. However, after a short period of time for various reasons, the investment property needs to be sold.
Capital Gains Tax is considered a passive investor tax for those that invest with an invest and hold strategy, which is not the intention of property flippers.
Flippers are more likely to be considered as traders, rather than passive investors, as such CGT would not normally apply, as such there would not be access to the 50% CGT discount.
– two main types of Flippers
This is where couples could get caught, buying homes, living in them for a short period of time while fixing up, and then selling in short succession always with a profit-making intention. The ATO considers this to be a profit-making activity from property renovations. The ATO will want you to report your net profit or loss from the renovations (proceeds from the sale of the property less the purchase, buying, holding renovating and selling cost in your tax returns as ordinary income, subject to your personal marginal tax rate.
Not a good outcome, and one to try and avoid. If you are a perennial property renovator, you run the real risk of being seen in the business of making profits from property renovations
Tax Considerations
The Business of Renovating Properties
Treating flipping properties as a way of living
Individuals and couples have decided to consider flipping properties on a regular basis of making a living, to replace their income as an employee, or to run other types of businesses.
The property purchases are considered trading stock (even if you live in it for a short period) all costs associated with buying, and renovating form part of the cost of trading stock until the property is sold.
The profit from flipping properties is calculated in the same way as any business with trading stock.
CGT doesn’t apply to assets held as trading stock, and CGT concessions such as the CGT discount, small business concessions and main residence exemption don’t apply to any income from the sale of the properties.
You’re entitled to an Australian business number (ABN) and you may be required to register for GST if the renovations are substantial.
If the Flip is a substantial renovation, the property is deemed to have become a new residential property subject to GST on the sale.
When is a flip gone too far to the point of considering new again?, see ATO GST ruling for more details GSTR20033, Paragraph 55-88
Criteria for substantial renovations (extract from GSTR 2003/3)
60. Whether renovations are substantial is to be determined in light of all the facts and circumstances.
61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiries to establish whether the renovations are substantial:
(i) the renovations need to affect the building as a whole, and
(ii) the renovations need to result in the removal or replacement of all or substantially all the building.
62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made.
We can help provide advice on how to assess any gains as either exempted, assessable under CGT or as trading profits.
If any profits are assessable as a trading profit, also whether GST needs to be considered, and how the GST Margin Scheme may help.
Please contact our office.
