July 15, 2024

Vagmare.com

The Intersection of Information and Insight

Flipping houses could soon be subject to 47% tax

5 min read

Australians who have ever thought of renovating an old property and on-selling it to make a quick profit might soon face a whopping 47% tax.

The idea, also known as ‘flipping’ has been made popular by TV reality shows like The Block is a popular but risky strategy with the goal of making improvements to a property which translates significantly up-sizing your bottom line.

Many property flipping seminars suggest you aim for a renovation outlay of around $2 for every $1 spent, for example.

And while I’ve already seen many house-flipping strategies flop, a new proposed tax could make the strategy even riskier.

An Administrative Appeals Tribunal (AAT) has now suggested that property renovators and ‘flippers’ are taxed at their highest marginal rate of up to 47% when they come to sell.

It would mean losing their 50% capital gains tax (CGT) discount effective even if they hold the property for 12 months or more, the lawyers added, which originally saw property flippers only pay tax on half of their net capital gain.

Generally, a taxpayer’s main residence is CGT-free for tax residents if the property is the main residence throughout the ownership period.

So essentially, property investors selling any property that could be regarded as a commercial transaction would lose out on the CGT discount.

The decision – which is being reviewed by the Australian Taxation Office (ATO) – could affect the tax treatment of a range of property investments – such as subdividing properties for development or “flipping”.

It could also have huge implications for Australia’s multi-billion-dollar renovation industry, which has been turbocharged by the prospect of big profits from quick property turnarounds, the AFR reports.

The ATO is also challenging tax exemptions where long-term property owners, such as farmers, decide to sell their land for commercial or residential development.

Why is CGT now under scrutiny for property renovators and ‘flippers’?

The popular CGT discount is under challenge after an AAT ruling allowed an 86-year-old self-funded retiree to offset losses on the sale of her downsizer apartment against other income because it was considered to be a commercial transaction.

Sydney-based Jenifer Bowerman successfully had losses on her downsizer apartment offset against other income because it was purchased with the intention of selling it for a profit.

In 2015, she bought an off-the-plan apartment in a complex at Foreshore Boulevard, Woolooware Bay, about 20km from Sydney’s CBD, for about $1.5 million.

Two years later she purchased another in Dune Walk at the same complex for $1.2 million where she intended to live until the first apartment was completed.

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