Flipping Houses - What's The Best Structure?

[Always Learning]

Hi All,

Myself and a friend are going to get into buying, renovating and selling on houses. I'll give a summary of the situation.

- We identify a property and purchase it. The first one will be 120 - 125K
- I will fund the purchase
- My friend will renovate and arrange grants
- We sell the property, aiming for 175 - 180K on this one.
- We divide the profits according to a pre-agreed split

My question is, what's the best way to do this? Just buy it in my name and pay my friend from the profits? Setup a Ltd. company / partnership etc.? At the moment, I'm only concerned with getting advice on doing it in the most tax efficient manner and how to extract the most money from the situation. I realise there are other considerations (insurance liability for example), however, for the sake of this query I'm only looking for advice on the best structure to maximise profit and enable me to share the profit with my partner.

Any advice in very much appreciated.

Regards,
AL

 

[Pinoy adventure]

Get trades lined up as certain things need registered trades people.

 

[ClubMan]

Setup a Ltd. company / partnership etc.?

Maybe the situation is different when flipping properties after upgrading them as opposed to holding and renting them, but these threads may be worth checking?

Key Post - Is there any merit in setting up a company to invest in property?

Hi, I am currently looking at investing in property and hoping to buy and appartment/house in Galway. I am also looking at a property with some commercial potential but needs some work. What I am wondering if it is worthwhile purchasing a property via a Ltd company and if there are any...

www.askaboutmoney.com

Buying a property through a company - any advice

A colleague is considering buying a second home primarily for his wife to use during the week for work in Dublin They have a primary residence outside of Dublin. Her husband has some money in a company that could be used to part fund this second home. It would not be a BTL. Are there any tax...

www.askaboutmoney.com

Purchasing a residential property through a profitable Limited Company

Hello All; I have seen some posts on this but I am not sure if this particular scenario has been covered. I have put some figures together on this. I am not sure that I have all the bases covered. I would welcome any input regards anything that I have not thought of.I am not an accountant so...

www.askaboutmoney.com

Buying a residential property through a company

i am a director of a cash rich company and have recently purchased a 5 bed residential house for the company for 260k can i claim any vat back off this property price for the company or is this not allowed .

www.askaboutmoney.com

 

[Brendan Burgess]

It seems a lot simpler to do it in your name or your joint names instead of through a limited company.

You would need some form of partnership agreement with your partner.

I doubt that the venture will last beyond the first property and so you will then be stuck with a limited company with unused losses or with profits which you will have to distribute tax efficiently. Then you will have to wind up the company.

So I would say try it as a sole trader or partnership first. If it turns out profitable and you want to engage in larger scale property development, then you might consider setting up a company. I doubt it will ever be the right idea.

Brendan

 

[T McGibney]

It seems a lot simpler to do it in your name or your joint names instead of through a limited company.

Hardly. Property development is a high-risk venture at the best of times, let alone amid runaway cost inflation and talk of possible recession.

Limited liability is king,

 

[Always Learning]

Maybe the situation is different when flipping properties after upgrading them as opposed to holding and renting them, but these threads may be worth checking?

Key Post - Is there any merit in setting up a company to invest in property?

Hi, I am currently looking at investing in property and hoping to buy and appartment/house in Galway. I am also looking at a property with some commercial potential but needs some work. What I am wondering if it is worthwhile purchasing a property via a Ltd company and if there are any...

www.askaboutmoney.com

Buying a property through a company - any advice

A colleague is considering buying a second home primarily for his wife to use during the week for work in Dublin They have a primary residence outside of Dublin. Her husband has some money in a company that could be used to part fund this second home. It would not be a BTL. Are there any tax...

www.askaboutmoney.com

Purchasing a residential property through a profitable Limited Company

Hello All; I have seen some posts on this but I am not sure if this particular scenario has been covered. I have put some figures together on this. I am not sure that I have all the bases covered. I would welcome any input regards anything that I have not thought of.I am not an accountant so...

www.askaboutmoney.com

Buying a residential property through a company

i am a director of a cash rich company and have recently purchased a 5 bed residential house for the company for 260k can i claim any vat back off this property price for the company or is this not allowed .

www.askaboutmoney.com

Thanks Clubman, however, I believe this would be treated differently to buying a property and renting it out. I understand that has been well covered here and the answer would seem, in that case, always do it in your own name. However, renovating / refurbishing and selling on would be treated differently to rental income, at least I think it would? If that is the case then I'm wondering what is the best way to structure it.

Get trades lined up as certain things need registered trades people.

That's not a problem, my partner / friend in this scenario is the MD or a decent size building company.

 

[Always Learning]

I should add that my partner in this venture owns a building company and I am the director of a company that's not trading, but could be used for this venture if it made sense.

 

[NoRegretsCoyote]

We identify a property and purchase it. The first one will be 120 - 125K
- I will fund the purchase
- My friend will renovate and arrange grants
- We sell the property, aiming for 175 - 180K on this one.
- We divide the profits according to a pre-agreed split

I'm not even sure the business model makes sense. I'm assuming your friend can add value via a labour:materials split of 2:1

Acquisition	€120k
Materials	€20k
Sale	€180k
Capital gain	€60k
CGT@33%	€20k

So you add value of €60k but €20k of that is materials and another €20k is CGT. I've assumed away EA, legal, stamp, duty, etc but also personal exemption for simplicity.

Bottom line you add €40k of value but lose half of it in tax. That's the same as being an employee but with far less risk

 

[Always Learning]

Hardly. Property development is a high-risk venture at the best of times, let alone amid runaway cost inflation and talk of possible recession.

Limited liability is king,

Hi McGibney,
For this venture, at least for the first, I don't think it will be a very high risk venture. The first one we have identified will be a cash purchase, it's well below the market value of a nice place in the area. My partner has spent his entire career in construction and has costed the job. I'm not too worried on that front, if it were an absolute disaster then we would break even in the worst case scenario. So for the purpose of this exercise, just assume I'm safe on that front. I'm interested purely from the point of view of taxes / distributing profits, what is the smartest way to set this up to get the best monetary gain.

 

[Always Learning]

I'm not even sure the business model makes sense. I'm assuming your friend can add value via a labour:materials split of 2:1

Acquisition	€120k
Materials	€20k
Sale	€180k
Capital gain	€60k
CGT@33%	€20k

So you add value of €60k but €20k of that is materials and another €20k is CGT. I've assumed away EA, legal, stamp, duty, etc but also personal exemption for simplicity.

Bottom line you add €40k of value but lose half of it in tax. That's the same as being an employee but with far less risk

Hi Coyote,

Thanks for taking the time to respond. It makes sense financially. The renovation will be almost entirely covered by grants, there is a grant of between 30-50K available.

There is a nice profit to be made on it for a couple of weeks work. The advice I'd like here is about what way to structure it to get the most back out.

 

[NoRegretsCoyote]

So for the purpose of this exercise, just assume I'm safe on that front. I'm interested purely from the point of view of taxes / distributing profits

It would help if you told us a bit more. Who will do the work? Your partner and/or workers from his firm?

I don't think it will be a very high risk venture.

House prices in Ireland are volatile. Over the course of a year the typical swings in the market could add or subtract €20k from your expected sale price. Add to this potential for construction inflation, one of you falling ill, the two of you falling out, cost overruns due to an unanticipated problem in the house, etc.

For most people this is indeed "high risk".

 

[T McGibney]

Hi McGibney,
For this venture, at least for the first, I don't think it will be a very high risk venture. The first one we have identified will be a cash purchase, it's well below the market value of a nice place in the area. My partner has spent his entire career in construction and has costed the job. I'm not too worried on that front, if it were an absolute disaster then we would break even in the worst case scenario. So for the purpose of this exercise, just assume I'm safe on that front. I'm interested purely from the point of view of taxes / distributing profits, what is the smartest way to set this up to get the best monetary gain.

Hi,

My comments are meant generally. Everyone who goes into property development expects their project to be low risk. It's still inherently risky.

I expect you'll have to pay good money for proper tax planning and tax risk management strategies.

 

[T McGibney]

So you add value of €60k but €20k of that is materials and another €20k is CGT. I've assumed away EA, legal, stamp, duty, etc but also personal exemption for simplicity.

Bottom line you add €40k of value but lose half of it in tax. That's the same as being an employee but with far less risk

Not a hope in hell of CGT applying to this. It's clearly a trade so it will be income tax or corporation tax.
RCT compliance could be the biggest tax headache.

 

[Always Learning]

It would help if you told us a bit more. Who will do the work? Your partner and/or workers from his firm?

The workers from his firm. Or at least that's what we had envisaged unless there is a reason that won't work? We can be flexible on that front.

House prices in Ireland are volatile. Over the course of a year the typical swings in the market could add or subtract €20k from your expected sale price. Add to this potential for construction inflation, one of you falling ill, the two of you falling out, cost overruns due to an unanticipated problem in the house, etc.

I don't think the housing market is going to drop much in the next year and the construction costs are covered by my partner. Perhaps other's would consider it risky, perhaps not, but for the sake of what I'm trying to get to here, let's just assume the risks are acceptable to me. It's the structure I'm not sure about.

 

[Always Learning]

I expect you'll have to pay good money for proper tax planning and tax risk management strategies.

I do have a tax consultant that I use for other issues. I'm meeting with him next week on some other matters and I've highlighted this new venture to him in advance so that I can get advice off him at that meeting also. However, I like to get several opinions on things hence the post here, it also helps to have some idea of the potential pros and cons of the ideas my tax guy will probably put forward ahead of time also. Having a basic idea beforehand will allow a more in depth discussion at the time

 

[T McGibney]

W

I do have a tax consultant that I use for other issues. I'm meeting with him next week on some other matters and I've highlighted this new venture to him in advance so that I can get advice off him at that meeting also. However, I like to get several opinions on things hence the post here, it also helps to have some idea of the potential pros and cons of the ideas my tax guy will probably put forward ahead of time also. Having a basic idea beforehand will allow a more in depth discussion at the time

It's impossible to give proper advice here as we haven't the first clue of your circumstances, nor of your level of experience in construction and business generally.

 

[RedOnion]

The renovation will be almost entirely covered by grants, there is a grant of between 30-50K available.

The terms of the specific grant scheme might determine if the house can be owned by a company or if it must be owned privately.

 

[Always Learning]

The terms of the specific grant scheme might determine if the house can be owned by a company or if it must be owned privately.

That could be a very important point I hadn't considered. Thank you. I'll check that out!

 

[Always Learning]

It's impossible to give proper advice here as we haven't the first clue of your circumstances, nor of your level of experience in construction and business generally.

If you can't advise that's fine, thanks for the responses nonetheless. However, I would have thought that the correct structure is the correct structure. No matter what my background, surely if it is better from a tax perspective to do this as a sole trader for example, then that is the correct way to do it and whether I'm Richard Branson or Joe Soap wouldn't affect what is the right approach?

For what it's worth, I ran a business for ten years (got out last year), completely different industry though. No experience in construction, but my partner runs a construction company so he has plenty experience on that front. I would view this as a test run with a view to increasing the scale down the line if things go well between us.

As you say though, if it's not something that can be easily advised on an internet board that's fine. As I said, I'm going to get advice from a tax consultant also.

 

[T McGibney]

As you say though, if it's not something that can be easily advised on an internet board that's fine.

It's not.

No matter what my background, surely if it is better from a tax perspective to do this as a sole trader for example, then that is the correct way to do it

As there are 2 partners, I'm at a loss on how a sole trader structure would work.

and whether I'm Richard Branson or Joe Soap wouldn't affect what is the right approach?

To be frank, of course it would affect the approach. Branson for example won't have to withdraw funds from the enterprise to pay his own bills whereas Mr Soap might.