Shows like The Block have us dreaming at the possibility of doing up a rundown property, selling it and making thousands in profit. This has become a popular activity in Australia, and often has some asking, what are some of the implications when flipping investment property?
In this article, we will cover:
- What is property flipping?
- Why flip an investment property?
- Key considerations when flipping investment property
What is property flipping?
Property flipping is a strategy involving the quick turnaround of buying and selling real estate for profit. There are two common ways to flip an investment property:
1. Purchase a low-cost property in an area with expected accelerated price growth, hold onto it short-term and sell at a higher price.
2. Purchase a property that needs work. Not a fixer-upper, but one where minor renovations can provide price increase through capital growth.
Why flip an investment property?
Property investment is often a long-term investment strategy – so why would a short-term strategy such as flipping be on the agenda?
At the end of the day, everyone’s investment strategy is different. For example, maybe you don’t want to do an immediate flip, rather a ‘quasi-flip’, and want to take some time to earn money from the property in the meantime.
Whichever the case, there are some key considerations when flipping property, especially one that is also being used as an investment.
Key considerations when flipping investment property
1. Timing the market
You don’t want your flip to be a flop, so it’s important to understand the market, do the research and time the sale right.
You’re not a fortune teller so it’s impossible to determine the exact date that the property needs to be on the market. Instead you need to analyse what the market is doing, keep up-to-date with reputable property researchers such as CoreLogic and Propertyology while not getting sucked into the misinformed media-induced property hype.
2. Setting expectations with tenants
Making improvements to an investment property means your tradespeople need access to the property, which of course comes as an inconvenience to your tenants.
This is where it’s essential to be transparent and have open lines of communication to avoid disgruntled tenants. Before they even move in, ensure the conversation is had about your plans with the property, establish an agreement (in writing) when improvements are made and leasing terms.
For example, offering discounted rent during disruptive periods could be a solution. It gets trickier when you need the tenant to move out temporarily while a renovation takes place.
If the tenant needs to find temporary accommodation, they can stop paying rent from the date they leave the property. A tenant may be able to end the lease early if they can no longer live in or can only partially live in the property. For this reason, it’s always recommended to do major works like renovating an entire bathroom after the tenant has moved out.
3. Capital gains tax (CGT)
Capital gains tax (CGT) is a tax payable on the capital gain made from the sale of an income-producing asset, including investment properties. Flipping an investment property usually means you want to make a capital gain, so you need to be aware of how CGT will impact the money you walk away with post-sale.
Your capital gain isn’t simply your purchase price vs sale price. While many factors impact it, a more appropriate way to look at CGT is the difference between ‘cost base’ of the property (purchase price, capital costs) and the sale price.
There are also several discounts and exemptions that can reduce the amount of payable CGT. The most common is the 50 per cent discount which you may be eligible for if you’ve owned the property for over twelve months. Your accountant will be able to provide further guidance on CGT as it’s their area of speciality and ultimately, they calculate any CGT payable.
4. Scrapping
Removing assets and structure is part and parcel of renovating. The difference is that when you do this to an investment property, you can take advantage of a process called scrapping.
Scrapping allows you to claim any undeducted depreciable value of removed assets. For example if you removed floorboards that still held depreciable value of $1,500 you can ‘scrap’ this as an immediate deduction.
A tax depreciation schedule prepared by a specialist quantity surveyor is key to claiming the maximum scrapped deductions during your investment property flip. An accountant will use this schedule to determine the undeducted depreciable value of removed assets, which informs your scrapped deductions.
To learn more about how a tax depreciation schedule can help you gain a financial advantage while renovating an investment property, contact BMT on 1300 728 726 or Request a Quote.