Forums: Discussions for entrepreneurs and small business.

From next year my wife and I are going to self build an eco-friendly house, live in it for a yet then sell for profit, would we be subject to capital gains tax? during that year we are going to buy small cottages, renovate and use as holiday lets, setting up a holiday letting business.  whilst these plans are in motion is do you have any recomendations of obtaining working capital as obviously mortgages will still have to be paid.

You are not going to bypass the fact you will need a mortgage for what you are trying to do. I have heard of seminars that shows you how to flip homes, but I do not know what they teach you about funding. Do you know anyone in this business?

Unless this is self funded, I beleive you are going to need a construction loan or creative style mortgage on the home prior to the approval of the certificate of occupancy.  After the C of O is issued, you can typically convert to a conventional mortgage.  Please keep in mind that normal Home Owners Insurance policies do not offer adequate protection until inspections are passed and C of O is issued.  This obvisouly varies by carrier, etc. 

As for Capital gains, I believe you would have to live in the home for 2 years for it to be considered primary residence and therefore not subject to capital gains.  In less than 2 years, it would be subject to normal income, short term capital gains or long term capital gains depending on the duration of the investment. 

I would strongly consider brushing up on the 1031 Tax Free Exchange (which is inaccurately named because it is a tax deferral not a tax free exchange).  This is also know as a Starker Exhcange (or a reverse Starker depending on the transaction). 

Most real estate books cover this very superficially (and inaccurately) due to some of the complexity of the provisions.  They really are not that complicated with regard to what you are attempting to do.  When you start trading properties, it becomes much more complicated.  I have done a 1031 Exchange on a property that saved me thousands in tax obligations.  The beauty of the transaction is that the longer you roll the gains, the lower the tax liability becomes at the time you cash out. 

Good Luck!

 

Concerning your business idea and the advice on 1031 exchanges. The
other person did not recognize that you are talking about the UK given
the phrase holiday let and your home country. 1031 exchanges is specific
to the US so no help on capital appreciation in the UK.

Second the advice they offered is inaccurate when it comes to when you
can use a 1031 even if this was a US real estate deal.

You need to check the rules in the UK for companies and taper relief. If
you live in the property there is no specific time that you have to live
there before claiming it as your primary residence. Look at both (company
ownership vs. personal residence) and see what makes the most sense. It
could be the company structure has more benefits given the focus of the
business and in terms of company benefits paid to the employees. Also
the tax rate for a company is pretty low on the initial profits.

Your ability to fund the initial projects could be a factor.

There are other issues related to VAT. If you have to pay VAT depends on
what you are doing. As you likely know VAT makes a big difference. It
might not be wise to live in the property if that makes you liable to pay
VAT on the construction materials. Getting VAT registered should also be
factored in when it comes to lead times.

I did make the assumption that this was a US driven decision.  I see that Stanners is from the UK but nothing in his/her post points this to a UK driven decision/strategy.

Can you point out where you feel I was inaccurate as you state   "Second the advice they offered is inaccurate when it comes to when you can use a 1031 even if this was a US real estate deal."?

 

What gave it away is the use of the term holiday lets. UK property
investors will talk about letting, holiday lets, buy-to-let (BTL) and other
phrases. They invest in property.

In the US we invest in real estate, have rental property and buy vacation
homes (to rent or to use).

It is subtle I grant you. It was enough for me to check the profile.

I invest in both the US and UK so see the terms every day.



Certainly.

The property has to be held for investment. You can not build and then
sell as it is more or less inventory then. Developers and builders can not
use the 1031 code for what is their inventory of new homes. If you hold
the property for investment most tax attorneys will want to see a tax
return showing rental income before they feel you have proof that it was
an investment property. They want to see the property as being in
service. If you buy and hold long term but have no income it could still fit
the 1031 rules (raw land, derelict building site, etc). It just can not look
like you are dealing (buy, fix sell or flipping, etc).

Living in the property is not helpful as that means it was not an
investment property. You already noted that point.

1031 tax deferred exchanges are great when deal fits. In the case of a UK
property the builder can live in it and then sell without pay tax. With no
minimum time required the deal can be pretty sweet.

I think it's better to be down to earth. Flipping houses are not a way to be successful. It's more like a gamble & speculation rather than seeing it as a business opportunity.

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