Planning for the consequences of increasing property values
Rising property values might seemingly fulfil the aspirations of many. However, there are unintended consequences which are worthy of thought and advice to optimise the situations.
Governments of all persuasions love to tax property – what use to be restricted to a minority is now applying to many.
Council rates are prorated to municipal residents based on individual property values.
Council valuations are used by the State Government to levy Land Tax. Objections to valuations for Land Tax purposes need to be aimed at the Council who may determine the value at a time when the Land Tax assessment is not current and thereby missing the opportunity to object to the valuation within required timeframes.
The principal place of residence is generally exempt from Land Taxes and Capital Gains Tax. However, when is a house a Principal Residence – can a holiday house gain exemption – can a couple have more than one Principal Residence – what happens if the Principal Residence is rented out for part of the year?
As an example, if the holiday home land value was $500,000, the land tax would be c $ 775. At $1,000,000 the land tax is $2,975 and at $2,000,000 the land tax is $12,475. These amounts can be even higher if there is more than one property that is not a Principal Residence, or if the land is owned in a trust. The land tax increases exponentially compared to increases in the land value.
So what to do:
· Subdivide the land subject to Council rules?
· Rent out the house to recoup some monies and to make some or all of the taxes tax deductible
· Sell up and suffer the capital gains tax
Succession is inevitable and in a previous generation was generally caused by a death in the family. Nowadays, with generally longer life spans, succession is starting to happen while two or more generations are alive and hopefully well.
Transfers of properties outside a Will attract stamp duty which tends to discourage dealing with inter-generational transfers and puts off the inevitable. Putting off the inevitable can create differences of equity between beneficiaries by virtue of property prices rising faster than other asset classes.
A common example is with farming families. More than one child but only one child is the farmer. Can the farm be passed to the farmer without causing a rift from unequal values? Should future tax liabilities (or lack thereof) attaching to land be considered at the time of division of assets?
The Relative Values of Assets
The real issue is the reassessment of life’s purposes.
· Does farming land become too expensive to farm?
· Is the beach house worth more than the family home?
Some farming land is realising monies beyond reasonable dreams and as such may enable opportunities to do other things that may never have been contemplated.
There are tax concessions for selling so called “small businesses” – so planning to come within these rules is highly recommended before the thresholds are exceeded.
The MVABennett Approach
We invite the conversation with our clients about relative values and the timing of asset sales.
In addition, the periodic review of Wills and estate planning is key.
Please contact your MVABennett team person if any of these matters resonate for you.