Fiona came across a two-bedroom apartment in Pyrmont, Sydney, for $380,000. Having done thorough research of the property market, particularly in the inner city, Fiona knew that this was massively under-priced and estimated it was closer to $440,000.
The owners were desperate to sell as they had already committed to another property and they were willing to sell the apartment for less to secure a quick sale.
Fiona didn’t have the cash to settle on the property, but she knew it was a great deal and believed she could on-sell the property to someone else at a substantial profit. She offered $370,000 and the vendor accepted. Fiona signed a 45-day contract with a deposit of $5,000.
Mark, a cashed-up interstate property investor, was told to get in touch with Fiona by a mutual friend who outlined that she was selling a property for less than market value. Based in Adelaide, Mark didn’t know the Sydney market very well, but believed that Fiona had done her research. He got an independent valuation, which confirmed that the property was worth $440,000. Within the 45-day settling period, Fiona sold the property to Mark for $425,000.
What’s wrong with this picture?
Although this contract-flipping transaction sounds great in theory, the reality is very different. In this example, Fiona bought the property for $370,000 and sold it off for $425,000. On paper, she stands to gain a $55,000 profit. However, once tax and other purchase and financing costs eat a huge chunk out of the net profit, the gain is considerably less.
While it’s still a great outcome for less than a month’s work, it demonstrates how a $55,000 book profit ($425,000 – $370,000) can be whittled down to just $20,000 after tax and expenses.
Fiona’s purchase price $370,000
Fiona’s selling price $425,000
Stamp duty (varies state to state) $13,500
Legal fees (approx) $2,500
Less costs -$16,000
Total profit $39,000
Less Capital Gains Tax – 48.5% of $39,000 $18,915
(assuming top marginal income tax rate)
Total profit: $20,085
What are the critical flipping factors?
“From my experience, it’s difficult and time-consuming to find a suitable property to flip,” warns buyer’s agent Patrick Bright. However, it’s possible, even in a soft market, to find properties for sale at less than market value, such as urgent sales due to the vendor’s divorce or terminated employment.
Don’t just flick through the real estate section in Saturday’s paper, but actually invest a large portion of time in getting to know the market in different locations; speak to local real estate agents, and the local council will give you a heads-up on any new developments, growth or infrastructure. “If you do your research and know fair market values, you’re much less likely to get ripped off,” advises Bright.
Finding someone to flip to is essential in a contract flip, because if you don’t lock a buyer in before the holding period expires, you’re going to be stuck paying the mortgage. The safest way to complete this transaction is to find a purchaser before you buy the property yourself – which is why keeping an extensive, qualified contact list of property investors is vital.
There are considerable costs associated with flipping, including legal fees, taxes, finance and purchasing costs, and other expenses. Budget carefully and realistically.
Flipping tax and legalities
If you do manage to successfully orchestrate a flip, the applicable taxes – stamp duty, capital gains tax and potentially land tax – will diminish your profits significantly.
Stamp duty will be effectively paid twice – first by the initial buyer and then again by the secondary buyer. There may be ways to avoid this, such as buying an option to purchase the property rather than agreeing to buy the actual property, but the legalities are complex; consult a solicitor.
Capital Gains Tax (CGT)
You can reduce the CGT payable by 50% simply by holding onto the property for 12 months; by flipping the property within a short timeframe, you won’t be eligible for this discount.
Land tax is a state tax levied each year by each state and territory of Australia, except Northern Territory. Generally, your principal place of residence or land used for primary production, such as a farm, is exempt from land tax. It’s payable by the owner of any interest in freehold land, if value of all land interests exceeds the relevant threshold, which varies from state to state and is reviewed annually. The threshold is currently $500,000 in Queensland, $350,000 in NSW and $225,000 in Victoria.
If you’re conducting a contract flip – that is, on-selling the property before you have acquired ownership of it – you may be legally required to be a licensed real estate agent to complete the transaction. Check with your solicitor to ensure you’re operating within the law.