When the market seems a bit so-so, many investors start to consider how they can increase property values and their wealth independently.
Sometimes, that involves renovating to boost its value and rental yield, and other times, after they have a few renovations under their belt, it involves developing a site.
However, property development should never be attempted without the necessary experience and support from an expert team because of the high costs and potential risks involved.
Another way to reduce risk is having a joint venture partner, who potentially shares the costs and the responsibilities.
That said, developing is not something that should be done simply because it seems “sexy” or there are “massive profits” to be made – even if you have a joint venture partner to share the load.
Eyes wide open
Before deciding to get involved in property development with a joint venture partner, it is vital that each person enters the arrangement with their eyes wide open.
This is especially true for projects that involve friends or family, because I have unfortunately seen too many relationships destroyed along the way.
In this blog, I’d like to consider a project where two people, perhaps friends or family, decide to buy land to build two properties with each party retaining one as an investment at the end.
Before beginning, however, it is vital that each party protects their interests with a formal legal agreement.
Such an agreement would outline factors such as:
- Their roles and responsibilties
- Finance availability
- Agreement on property style and location
- Ability to complete
- Feasibility study
- Default remedies
- Tax implications
- Ownership structure
- Exit strategy.
While it’s vital that everyone’s interests are protected via such an agreement, it should also outline the various tax obligations of the project.
Alas, I have seen too many examples of people paying more tax on completion than there was profit in the deal, which could have been totally avoided with the appropriate planning and advice.
Maximise the opportunity by using the correct ownership structure
It is also essential that the land is bought in the correct ownership structure to prevent problems down the road.
For example, buying as joint owners will mean that the other party will automatically receive the other property when the other person dies – which is usually not the motivation for the project.
Buying as tenants in common will ensure that the property is passed on to the estate of that specific person when they pass away.
It’s vital to understand that co-developing, even with family, is a business relationship not a personal one.
The next step is to agree which percentage ownership each person holds, which will be dependent on a number of variables too many to mention here, however, in this example let’s assume it’s 50/50.
The next consideration is the ownership structure of each property, which again needs to be finalised from the outset and usually requires specialist taxation advice.
What happens after completion?
Let’s jump forward to the successful completion of a duplex.
What happens next?
Well, as long as the correct agreements and structures were in place early, it can be quite simple.
However, what usually happens is that myriad taxes are triggered when the co-owners try to create titles on the newly built properties.
These taxes can include income tax, GST as well as stamp duty, which can potentially cost tens of thousands of unnecessary dollars.
Sometimes that results in the parties opting to remain as co-owners, which brings with it many future tax problems.
In reality, if they didn’t have the ownership structures sorted out at the start, they are probably just delaying the inevitable.
So, how do you save on taxes but still have individual ownership?
Working with an expert would allow for both parties to enter into a specially worded joint venture agreement to manage the commercial and taxation terms of the project before they signed a contract of sale.
As the bulk of the agreement is tax focused it should be prepared by a tax lawyer who also understands property.
A correctly worded agreement would allow them to buy together and then split on completion without triggering either income tax or GST.
As each project is unique, there are other variables that can be ironed out at the outset – as long as you have the right advice.
For example, the use of an appropriately worded joint venture agreement has been used by some Metropole Wealth clients to develop a duplex where one property is a home and the other as an investment, however, the project was completed to achieve maximum benefit for both parties.
So, if you’re considering developing with a joint venture partner, Metropole Wealth Advisory can assist by:
- Reviewing the investment grade nature of any property strategy
- Preparing an appropriately worded joint venture agreement
- Advising on different ownership structures
- Outlining asset protection strategies
- Providing advice on accounting and tax considerations.
What about you?
If you’re a business owner, a professional or an established property investor why not have a chat with me about your personal circumstances.
You deserve your own private wealth advisor to create a Strategic Wealth Plan for your personal needs.
Having a Strategic Wealth Plan means you’re more likely to achieve the financial freedom you deserve desire because we’ll help you:
- Define your personal, financial and business goals;
- See whether your goals are realistic, especially for your timeline;
- Measure your progress towards your goals – whether your investments or business is working for you, or if you’re working for it;
- Find ways to maximise your wealth creation;
- Identify risks you hadn’t thought of.
And the real benefit is you’ll be able to grow your wealth faster and more safely than the average investor and leave a legacy.
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