Property Sale: Leveraging the 15-Year Exemption
BobCo, a limited company wholly owned by Bob, originally bought a property for $1 million using $50,000 of its own capital and a $950,000 mortgage. By the time Bob sells BobCo (via a share sale), the mortgage is fully paid off, and the property is now worth $2 million. In this post, we’ll explore how this impacts the disposal—specifically Bob’s sale of BobCo’s shares—and the tax implications, including the potential use of the small business 15-year exemption to avoid Capital Gains Tax (CGT). Buckle up—this gets intricate!
Key Details
Initial Purchase
- Property Cost: $1 million
- BobCo’s Capital Contribution: $50,000
- Mortgage: $950,000 (fully paid off by the time of sale)
Sale Context
- Property Value at Sale: $2 million
- Share Sale: Bob sells 100% of BobCo’s shares to a buyer for $2 million (reflecting the property’s value, assuming no other assets or liabilities)
- Mortgage Status: Paid off, so BobCo owns the property outright
Assumptions
- The property has been an active asset (used in BobCo’s business) for at least 7.5 of the 15+ years Bob has owned BobCo.
- Bob meets the 15-year exemption criteria: 55+ years old, retiring, BobCo qualifies as a small business (< $2 million turnover or < $6 million net assets).
Step 1: Understanding BobCo’s Position
BobCo’s Balance Sheet at Sale
- Asset: Property worth $2 million
- Liabilities: $0 (mortgage paid off)
- Net Equity: $2 million
How the Mortgage Was Paid Off: Over the 15+ years, BobCo repaid the $950,000 mortgage using business profits, additional capital injections, or a combination. This doesn’t directly affect the CGT calculation but influences Bob’s investment in BobCo (his share cost base).
Step 2: Bob’s Share Sale
Bob isn’t selling the property directly—he’s selling his shares in BobCo. The CGT event occurs at Bob’s level, not BobCo’s, because BobCo retains ownership of the property.
- Sale Price: Bob sells his shares for $2 million (the value of BobCo, driven by the property).
- Cost Base of Shares: This is what Bob originally invested in BobCo, adjusted for certain factors:
- Initial Capital: Suppose Bob contributed $50,000 to start BobCo, used for the property deposit. This is his base investment.
- Adjustments: If Bob injected more capital to pay off the mortgage or if BobCo retained profits (not paid out as dividends), his cost base might increase. For simplicity:
- Bob’s initial share cost base is $50,000 (the equity he put in).
- No further capital contributions from Bob personally; the mortgage was paid from BobCo’s profits.
- Capital Gain:
- Sale Proceeds: $2 million
- Cost Base: $50,000
- Gain: $2 million - $50,000 = $1.95 million
Step 3: Applying the 15-Year Exemption
Bob wants to use the small business 15-year exemption to avoid CGT on the $1.95 million gain from selling BobCo’s shares. Let’s check eligibility:
- Small Business Test:
- BobCo’s aggregated turnover < $2 million OR net CGT assets < $6 million.
- With the property at $2 million and no other significant assets, BobCo likely qualifies.
- Active Asset:
- The property must have been active (used in BobCo’s business) for at least 7.5 of the 15+ years.
- If it was, the shares in BobCo (tied to the property) qualify as active assets.
- Ownership Period: Bob has owned the shares in BobCo for 15+ years.
- Significant Individual: Bob owns 100% of BobCo, exceeding the 20% threshold.
- Age/Retirement: Bob is 55+ and selling as part of retirement (or permanently incapacitated).
Outcome
If all conditions are met:
- Bob disregards the entire $1.95 million capital gain.
- CGT Payable: $0
- Bob Receives: $2 million tax-free
Step 4: Impact of the Mortgage
The mortgage doesn’t directly alter the CGT calculation for Bob’s share sale, but it affects the economics and Bob’s cost base:
Cost Base Nuance
- Bob’s cost base is tied to what he invested in BobCo’s shares, not the property’s cost. The $950,000 mortgage was BobCo’s debt, not Bob’s personal contribution.
- If BobCo paid off the mortgage using profits (taxed at the corporate level), those profits don’t increase Bob’s cost base unless retained earnings were capitalized into his shares (rare without specific structuring).
- If Bob personally injected funds to pay the mortgage, his cost base would rise by that amount. For simplicity, assume he didn’t—cost base stays $50,000.
Economic Impact
- BobCo’s $50,000 initial capital turned into $2 million because the mortgage leveraged the investment.
- The $950,000 loan amplified the property’s growth, but Bob’s CGT gain ($1.95 million) reflects the full increase in BobCo’s value, not just his cash input.
- The paid-off mortgage means BobCo has no liabilities, making it a clean $2 million asset for the buyer.
Buyer’s Perspective
The buyer pays $2 million for BobCo, acquiring a company with a $2 million property and no debt. The mortgage history is irrelevant to them—it’s fully settled.
Conclusion
The mortgage, fully paid off by the time Bob sells BobCo, doesn’t derail the 15-year exemption. Bob sells his shares for $2 million, with a $1.95 million gain (based on a $50,000 cost base). If he qualifies (55+, retiring, 15+ years ownership, small business criteria), he pays no CGT, pocketing $2 million tax-free. The mortgage amplified BobCo’s value from a $50,000 investment to $2 million, but since the share sale focuses on Bob’s gain, the financing structure doesn’t complicate the CGT outcome. The buyer gets BobCo with a debt-free $2 million property—clean and simple. This leveraged start just makes Bob’s tax-free windfall even sweeter!
BobCo's Property Sale: Leveraging the 15-Year Exemption
BobCo, a limited company wholly owned by Bob, originally bought a property for $1 million using $50,000 of its own capital and a $950,000 mortgage. By the time Bob sells BobCo (via a share sale), the mortgage is fully paid off, and the property is now worth $2 million. In this post, we’ll explore how this impacts the disposal—specifically Bob’s sale of BobCo’s shares—and the tax implications, including the potential use of the small business 15-year exemption to avoid Capital Gains Tax (CGT). Buckle up—this gets intricate!
Key Details
Initial Purchase
- Property Cost: $1 million
- BobCo’s Capital Contribution: $50,000
- Mortgage: $950,000 (fully paid off by the time of sale)
Sale Context
- Property Value at Sale: $2 million
- Share Sale: Bob sells 100% of BobCo’s shares to a buyer for $2 million (reflecting the property’s value, assuming no other assets or liabilities)
- Mortgage Status: Paid off, so BobCo owns the property outright
Assumptions
- The property has been an active asset (used in BobCo’s business) for at least 7.5 of the 15+ years Bob has owned BobCo.
- Bob meets the 15-year exemption criteria: 55+ years old, retiring, BobCo qualifies as a small business (< $2 million turnover or < $6 million net assets).
Step 1: Understanding BobCo’s Position
BobCo’s Balance Sheet at Sale
- Asset: Property worth $2 million
- Liabilities: $0 (mortgage paid off)
- Net Equity: $2 million
How the Mortgage Was Paid Off: Over the 15+ years, BobCo repaid the $950,000 mortgage using business profits, additional capital injections, or a combination. This doesn’t directly affect the CGT calculation but influences Bob’s investment in BobCo (his share cost base).
Step 2: Bob’s Share Sale
Bob isn’t selling the property directly—he’s selling his shares in BobCo. The CGT event occurs at Bob’s level, not BobCo’s, because BobCo retains ownership of the property.
- Sale Price: Bob sells his shares for $2 million (the value of BobCo, driven by the property).
- Cost Base of Shares: This is what Bob originally invested in BobCo, adjusted for certain factors:
- Initial Capital: Suppose Bob contributed $50,000 to start BobCo, used for the property deposit. This is his base investment.
- Adjustments: If Bob injected more capital to pay off the mortgage or if BobCo retained profits (not paid out as dividends), his cost base might increase. For simplicity:
- Bob’s initial share cost base is $50,000 (the equity he put in).
- No further capital contributions from Bob personally; the mortgage was paid from BobCo’s profits.
- Capital Gain:
- Sale Proceeds: $2 million
- Cost Base: $50,000
- Gain: $2 million - $50,000 = $1.95 million
Step 3: Applying the 15-Year Exemption
Bob wants to use the small business 15-year exemption to avoid CGT on the $1.95 million gain from selling BobCo’s shares. Let’s check eligibility:
- Small Business Test:
- BobCo’s aggregated turnover < $2 million OR net CGT assets < $6 million.
- With the property at $2 million and no other significant assets, BobCo likely qualifies.
- Active Asset:
- The property must have been active (used in BobCo’s business) for at least 7.5 of the 15+ years.
- If it was, the shares in BobCo (tied to the property) qualify as active assets.
- Ownership Period: Bob has owned the shares in BobCo for 15+ years.
- Significant Individual: Bob owns 100% of BobCo, exceeding the 20% threshold.
- Age/Retirement: Bob is 55+ and selling as part of retirement (or permanently incapacitated).
Outcome
If all conditions are met:
- Bob disregards the entire $1.95 million capital gain.
- CGT Payable: $0
- Bob Receives: $2 million tax-free
Step 4: Impact of the Mortgage
The mortgage doesn’t directly alter the CGT calculation for Bob’s share sale, but it affects the economics and Bob’s cost base:
Cost Base Nuance
- Bob’s cost base is tied to what he invested in BobCo’s shares, not the property’s cost. The $950,000 mortgage was BobCo’s debt, not Bob’s personal contribution.
- If BobCo paid off the mortgage using profits (taxed at the corporate level), those profits don’t increase Bob’s cost base unless retained earnings were capitalized into his shares (rare without specific structuring).
- If Bob personally injected funds to pay the mortgage, his cost base would rise by that amount. For simplicity, assume he didn’t—cost base stays $50,000.
Economic Impact
- BobCo’s $50,000 initial capital turned into $2 million because the mortgage leveraged the investment.
- The $950,000 loan amplified the property’s growth, but Bob’s CGT gain ($1.95 million) reflects the full increase in BobCo’s value, not just his cash input.
- The paid-off mortgage means BobCo has no liabilities, making it a clean $2 million asset for the buyer.
Buyer’s Perspective
The buyer pays $2 million for BobCo, acquiring a company with a $2 million property and no debt. The mortgage history is irrelevant to them—it’s fully settled.
Conclusion
The mortgage, fully paid off by the time Bob sells BobCo, doesn’t derail the 15-year exemption. Bob sells his shares for $2 million, with a $1.95 million gain (based on a $50,000 cost base). If he qualifies (55+, retiring, 15+ years ownership, small business criteria), he pays no CGT, pocketing $2 million tax-free. The mortgage amplified BobCo’s value from a $50,000 investment to $2 million, but since the share sale focuses on Bob’s gain, the financing structure doesn’t complicate the CGT outcome. The buyer gets BobCo with a debt-free $2 million property—clean and simple. This leveraged start just makes Bob’s tax-free windfall even sweeter!