The headline figures look tempting: 29 townhouses in Perth sold for more than $33 million, a $60 million price tag for 13 strata units in Chatswood, and more than $80 million for 55 units in Macquarie Park.
In each deal, neighbours were able to band together to get a much better dollar price for their homes from developers by amalgamating their properties.
But understanding how the Australian Tax Office treats these horizontal collective sales (when land is amalgamated) or vertical collective sales (when apartments are sold together) can be complex.
The trend has had serious momentum over the past couple of years, particularly in Sydney where the booming property market has tempted home owners to go beyond simply listing their properties on the market.
Instead, they might band together with their neighbours to sell their combined lots to a developer for a higher price or delve into the world of property development and develop the lots themselves.
A report issued last September by real estate agents Knight Frank found the trend to collective sales had grown six-fold over the past five years, representing nearly 18 per cent of disclosed total sales of sites suitable for high density redevelopment.
In NSW, vertical collective sales represented about 8 per cent of the market in 2016-17 while in Queensland, horizontal collective sales represented nearly 16 per cent of total residential development sites. In each case, foreign buyers represented a major portion of the market.
The demand for collective sales has been accelerated by changes in NSW to strata laws that make it easier for groups of neighbours to head to a collective sale even if not all owners are on board.
While the rewards of this kind of agreement may be potentially large they also come with risk — and home owners should be wary of the ATO’s treatment of these investments and where the tax implications lie.
From the perspective of a home owner, one of the biggest concerns is the complete loss of your capital gains tax (CGT) exemption on your main residence.
If the lot you are choosing to combine with your neighbour and sell to a developer is your primary residence, in the eyes of the ATO it may no longer be your primary home.
The devil is in timing and the type of arrangements you enter in to with the developer. If you simply sell your house as is and walk away, you will ordinarily keep your main residence exemption. Any other arrangement, however, is likely to have problems and extreme care needs to be taken.
The issue is that many people don’t want to simply walk away early with the money and wish to maximise the value they get by staying “in the deal” – perhaps until the DA is approved, or in some instances a joint venture with the developer to stay in until completion and sale.
If you stay “in the deal” past the point where your house is demolished or the title is consolidated with the other owners – sometimes even if you still live at that residence - then you no longer are selling your main residence, and as such, the CGT exemption will be treated as having never applied.
In other words, you have to pay capital gains tax based on your new sale price less the price you originally paid for the home. Especially in Sydney, that has the potential to be a large figure.
The same issue also applies if you decide to enter into a joint venture arrangement with a builder, where you and your neighbours retain ownership of the land but share in the profits with the builder when the end product is sold.
So, what can you do to avoid these risks? Well, unfortunately there isn’t a simple answer and every deal is different. You will need to get quality advice.
Add to this problem the commercial risks and management problems of being in bed with a property developer and a bunch of your neighbours, who may have been nice as neighbours, but perhaps different in business and when money is involved provides some cause for concern and balance to the attraction of a higher return.
You may well end up with less than just taking the money upfront and walking away.
The tax risk doesn’t end there either. If the ATO considers you are in the deal to make a profit, then the concessions on making a capital gain fall away and some or all of the gain will be subject to full income tax rates.
Can you manage this by transferring the property into a separate entity? Yes, in part - this option has the benefit of isolating development risk, but it also comes with significant stamp duty and income tax costs, that will crystallise well before you are able to realise cash flow from property sales.
Managing the issues and timing carefully without transferring the property can mitigate CGT impacts, and it is possible with careful planning to crystallise your CGT concessions up to a certain point in time, after which you will be subject to normal income tax.
In short, the structure on which you may enter arrangements with other parties can severely impact your commercial exposure — getting it wrong can put your valuable property at risk.
Before you rush to market with the neighbours, therefore, look at this and your tax exposure as not every sale will lead to rivers of gold.