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Thread: What is the optimal tax structure for small property development?

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    What is the optimal tax structure for small property development?

    A friend would like to start small in property development buying a stand and using a builder to build a house on this stand which he will then sell at a profit. Then repeat.
    The property is at the coast, sea views and all of that. Selling price at the end around R1.6M
    What advise would you give to structure such a deal? What type of entity should the deal be done in? What should he keep in mind (any lessons learned)?

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    I have never done such thing before, but I think tax should be the first and foremost determining factor. Gut feel tells me that I would never do this in my personal name. Best would be to ask his accountant as a starting point.
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    The ideal thing would be to have an already VAT registered company and transfer the property into the company and do the development. Your builders and service providers will charge VAT which you can claim back when you sell the property.

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    Is the builder registered for vat? At the end of the day vat is payable on the full selling price but only off set by your input vat paid. So you could end up paying quite a bit more than you could claim back. For the first house I would build in my own name and reconsider the situation if I wanted to continue building.

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    Quote Originally Posted by Richard S View Post
    Is the builder registered for vat? At the end of the day vat is payable on the full selling price but only off set by your input vat paid. So you could end up paying quite a bit more than you could claim back. For the first house I would build in my own name and reconsider the situation if I wanted to continue building.
    ^ Probably better advise than what I said, I'm not a tax expert.

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    I was considering more the Capital Gains Tax implications (think that is more than the VAT).
    The builder is VAT registered, and the intention is to do more than one flip (this isnt normally my area of expertise, I buy, reno, keep). If the stand is purchased let's say at R100K (to make it easy), and the house build for R1M, it's all sold for R1,6M at the end, this means a profit of R500K. Is this handled as capital gains (and at what rate - company vs Trust). Or will it be handled purely as Profit (in Trust can be distributed, or paid at Income tax rate, in Pty Ltd after other expenses, still taxed as income tax)
    If purchased in personal name, but the house was never occupied, will SARS allow the transaction without CGT?

    On the VAT if I calc correctly, the VAT on the R1M would be less than the selling price VAT at R1,6.

    Any transfer duty considerations?

    Your opinions / advise will be much appreciated.

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    Is this handled as capital gains (and at what rate - company vs Trust). Or will it be handled purely as Profit (in Trust can be distributed, or paid at Income tax rate, in Pty Ltd after other expenses, still taxed as income tax)
    If purchased in personal name, but the house was never occupied, will SARS allow the transaction without CGT?
    In the scenario you describe, it is not capital gains, but normal operating profit.

    Capital versus revenue is not decided so much by the nature, but by intention.

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    Quote Originally Posted by Houses4Rent View Post
    I have never done such thing before, but I think tax should be the first and foremost determining factor. Gut feel tells me that I would never do this in my personal name. Best would be to ask his accountant as a starting point.
    Sorry, I meant: tax should NOT be the first and foremost determining factor when deciding on a structure.
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    Intention is the key.

    If you buy the property with the intention of using it in the furtherance of your enterprise, then it is capital in nature.
    However as you explain it seems definite that you are doing this to generate revenue. Thus revenue in nature. Thus in simple terms, the income less the deductible expenditure related to the income will attract tax at 28%.

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