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When a ‘flip’ becomes a ‘flop’ – Mark Chapman

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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.  Mark Chapman from H&R Block Tax Accountants looks at where house flippers stand from a tax perspective.

Transcripts:

Kevin:  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 last year. Whereas the bulk of this spend would previously have been attributed to private renovation, this notably high figure is undoubtedly inflated by house flipping, which is a process whereby individuals buy a property, renovate it, and then sell it on for sometimes a tidy profit – not always, but sometimes.

Programs such as The Block, which we’ve talked about before, might make house flipping seem pretty straightforward and lucrative, but there are also a number of tax issues that house-flippers should be aware of. So, let’s take a brief look at where house flippers stand from a tax perspective. Joining me is Mark Chapman, who is the tax communications director for H&R Block tax accountants.

Mark, thank you very much for your time.

Mark:  No problem.

Kevin:  House flipping, as I described there, is the process of turning a property over fairly quickly, so would I be correct in saying that capital gains tax is going to be the first obstacle you might come up against?

Mark:  Certainly, tax in some form is going to be an obstacle. Depending on how frequently you flip – in terms of whether it’s a one-off thing or something that you’re almost doing as a way of life, as a business – you’re either going to be paying capital gains tax or you’re going to be paying income tax.

Kevin:  What are some of the other problems you see flippers come up against? What should they be aware of?

Mark:  I guess the first issue is that probably the best way to do this actually is to move into the property while you’re flipping. If you don’t actually have anywhere else to live and you’re basically in a process of moving from one house to another, you buy the house, you move in, you renovate, and then you sell, and then you repeat the process, you’re actually probably in a pretty good position from a tax perspective because you can potentially take advantage of what’s called the main residence exemption for capital gains tax.

The house that you’re renovating becomes your main residence, which means that you can then sell it capital gains tax-free at the end. You obviously need to actually physically live in the house; you can’t have a main residence anywhere else. But if you’re doing it that way, that’s actually really tax-effective.

Kevin:  It effectively becomes your principal place of residence. Is that right?

Mark:  Yes, that’s right. You basically live in the house whilst you’re renovating it, then you sell, and then you repeat the process.

Kevin:  It might make sometimes for a very unhappy partner, if you’re moving your partner every six months or so.

Mark:  Yes, that’s right, especially if you have a young family, although some people do that. You can see that kind of thing on TV all the time with these home makeover shows. And from a tax perspective, that’s the best way of doing it. Not necessarily the best way from a settled lifestyle perspective, though.

Kevin:  Mark, is there a timeframe from when you first purchase to when you move in and how long you need to live in it before you can actually flip it?

Mark:  No, it comes down to the fact of whether it is your main residence or not, so whether you actually live there, whether it’s the place you’re actually living, whether it’s the place where you’re registered on the electoral register, getting your bills, etc.

If it’s actually your main residence, then there’s no minimum period. The longer you stay there, obviously the better from a tax perspective, but if it is physically your house, then you are covered by that exemption.

Kevin:  How many times do you see people go through the process of doing some flipping? Because as you rightly say, on programs like The Block, it looks so easy, and they potentially make hundreds of thousands of dollars. They come to you after the event and say, “Well, that wasn’t really all that worthwhile,” because they didn’t see this coming. How often does that happen?

Mark:  It is one of those things that people go into without considering the tax aspects. I think particularly with the advent of all these home makeover shows like The Block, it’s something that’s become a bit fashionable, to get into property. People think that there’s easy money to be made there because they see rising house prices in Sydney, Melbourne, Brisbane, all the capital cities – well, most of the capital cities.

And it may well be that there is a good profit to be made there, but you have to be aware of two things. First of all, the tax on the profit that you make in terms of the renovation and the flip, but then there’s the other cost; every time you buy a house, you have to pay stamp duty, and that’s something that people don’t take into account.

You may be paying $30,000, $40,000, $50,000 in your stamp duty just to get the process started, so you have to make a profit at the end of at least that much just to cover your stamp duty, never mind all the other costs and so on that you’re spending.

Kevin:  It says a lot for making sure you’ve got a good tax accountant on board before you even start the process, doesn’t it?

Mark:  Yes. I think the main thing is before you get into this – and this is the same with any kind of business transaction – it pays to sit down, talk to somebody who understands tax, and just work out what the tax implications might be, what additional costs that might impose on you.

And if you factor in those costs and it still looks like you’re going to make a decent return on the investment, then go for it. But if you add in the tax, which you may not have previously considered, and it doesn’t look like such a good investment, then it’s better to find that out before you start rather than halfway through – or worse still, at the end.

Kevin:  Even a bit of due diligence along the way, too, because stamp duty does vary in different states around Australia, and there’s actually quite a big variation, isn’t there?

Mark:  Yes, exactly right. I don’t claim to be a stamp duty expert, but you’re absolutely right; completely different in every state. So if you do get into the process of flipping houses in other states, then you’re definitely leaving yourself exposed because you can’t assume that stamp duty in your place is going to be the same in another state.

Kevin:  Mark, great talking to you. Thank you very much. Mark Chapman is the tax communications director at H&R Block tax accountants, and you can reach him at their website.

Mark, thanks for your time.

Mark:  No problem. Thanks very much.

 

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