Trading Properties: What are the pitfalls for the unwary?
Rob Balanda, is a well respected solicitor, property investor, author and legal educator who knows how to walk the walk and talk the talk. Partner in a successful law firm, Rob has been educating investors, agents and brokers on special contract conditions for 25 years. The Reno Kings recently spoke with Rob Balanda about the pitfalls of trading properties...
The Waiting Game
|
 |
I received a call from an investor who had been sitting on an old fibro cottage in an area which he thought would be a prime redevelopment site. He had been watching prices rise and rise but in the past year or two they’d slipped back. He didn’t find this out until he put the property on the market at what he thought would be a record price, only to find out that the market hadn’t rung a bell when it hit the top, and he’d missed the upswing.
The Expensive Trade
|
 |
Keen to sell the property but with unrealistic expectations about its value, he placed an ad in the exchanges and trades section in the real estate part of his local newspaper. As luck would have it he found someone with a similar problem and he agreed to exchange his property for another person’s expensive unit. The exchange got him out of a property that he no longer wanted but he didn’t have the cash from the sale to, for example, pay his capital gains tax. I also gave him a fright when I told him the amount of stamp duty he’d have to pay on the expensive unit that he was trading.
The Legal Implications
|
 |
He then suggested to me that we should “write down” purchase prices of both properties to save him and his co investor a bit of stamp duty and a lot of tax. Wrong. My advice to him was this was a definite no-no and I strongly urged him not to do it.
The reasons I gave him were as follows:
| 1. |
Fraud: Writing down the purchase prices deprives the Australian Tax Office of revenue and this is considered fraud. |
| 2. |
Entitlements: The Office of State Revenue is entitled to stamp duty on the purchase price of the traded property or its value, whichever is the greater, and by writing down the purchase prices he will deprive them of revenue. |
| 3. |
Loan Value: As he was transferring a loan from the fibro dwelling to the unit this created all sorts of problems for him and his lender. Lenders base the amount they’re advancing on the value of the property or the purchase price – whichever is the lesser. If he wrote down the value, the lender wouldn’t be able to transfer the full amount of the loan that he had on the fibro cottage over to the new unit. |
| 4. |
Capital Gains Tax: This one is the worst of all as you artificially create a lower cost base for capital gains tax purposes which could come back to haunt you in the future. For example, if you wrote down the value of a property which was valued at $600,000 to a $400,000 sale price and you later sold the property after it had gained $200,000 (making it now worth $800,000), tax would be payable on the amount of $400,000 ($800,000 less $400,000). This is a huge mistake and the investor wanted to do it to save himself a miserable amount of stamp duty. Forget it! |
Renovate on a Budget | Finding Cash Flow Positive Property
Landscaping for Landlords | Get a Property Education | Privacy Policy | Disclaimer
|
