Legally Avoid Property Taxes: 51 Top Tips to Save Property Taxes and Increase Your Wealth by Iain Wallis

Legally Avoid Property Taxes: 51 Top Tips to Save Property Taxes and Increase Your Wealth by Iain Wallis

Author:Iain Wallis [Wallis, Iain]
Language: eng
Format: mobi
Publisher: Powerhouse Publishing
Published: 2014-08-31T23:00:00+00:00

6.2 Trading Stock

As a property trader you are simply buying properties to add value – whether that be from a complete refurbishment or by adding further rooms, title split or whatever.

So, rather like a shop that buys in stock to sell, your business is exactly the same. All of the costs in acquiring this property are part of your ‘cost of sales’. It will not, and will never, be an investment: you plan to sell on as quickly as possible and make a tidy profit.

Of even better news is that we can avoid the heated debate as to whether the expenses are of a revenue or capital nature, because here they are all revenue related. So, for example, whereas an investor has to carry forward the cost of the legal fees, here, as a trader, they are part of the cost of the property. Where an investor has to carry forward the cost of adding a new room in the roof, here it will be a cost of sale.

One would hope that project gets turned around during the year and doesn’t appear in stock at the year end – but not every project goes according to plan. If the property remains unsold then the expenses incurred are not yet written off but instead taken into stock.

O’Gara buys a property for £120,000 and incurs additional costs in securing the property of £5,000. Work commences immediately, but the weather conspires against O’Gara and the builders such that, by the December year end, the project has not been completed. At that date the build costs amount to £15,000. In the accounts (but shown as stock not an expense) will be the cost of expenditure to date, namely £140,000.

Despite continued wind and rain the project is completed after further build costs of £25,000.

When the accounts now come to be prepared they will show in cost of sales (i.e. a revenue expense) £165,000 (i.e. the total cost of obtaining the property and making it ready for re-sale) which will be deducted from the sales proceeds.

Techie Point: typically, as with O’Gara, stock is valued at the lower of cost and ‘net realisable value’. So with O’Gara that would be £140,000. But let’s suppose it was a much bigger project; the whole property took much longer to renovate or add value to, and the market value actually went down. In these circumstances we would need to show this, in the accounts, at the lower net realisable value.

Just to add further confusion if a contract was in place for the sale of the property, accountants would get very excited about apportioning the overall value of the contract. Be aware of it but leave it for them to get excited about.


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