Tax Tip 43: Demolishing PPOR and Subdividing land and building 2 houses

The Main Residence is generally exempt from CGT. Land cannot be a main residence unless there is a dwelling on that land, there is an exemption for demolishing the main residence and building a new property with a few conditions

• It must have been your main residence before the demolition and
  
  
• It must be complete within 4 years and
  
  
• You must live in, as your main residence, the completed property for at least 3 months, and
  
  
• claim no other property during this time
  

If all these conditions are met the main residence exemption can continue to apply even though you will be living elsewhere during construction.


But where you split the land and end up with 2 houses the main residence exemption can only apply to one of those houses. The portion of the land and construction cost for the new house cannot be eligible for the main residence exemption as you would have already claimed this on the other property. section 118-110 of the ITAA 1997.


All this assumes you are not a ‘developer’.

 

Would CGT on the second dwelling start from a cost base of the value of that dwelling (including the land) on completion of construction?

Or would it be based on the value before construction plus the cost of construction?

So if the value went up by more than the cost of construction (due to the subdivision), would there already be some gain subject to CGT (though presumably not payable until the property was sold)? And would one therefore need to get the property valued before the development rather than after for determining the cost base?

GP

 

Cost base would be the land component (% of original amount) plus other costs not otherwise claimed.

 

Thanks, Terry.

 

And don't forget that a portion of the interest, rates, etc from the original main residence period can be used to increase the cost base on the investment properties to reduce CGT on the eventual sale. Section 110-25(4) ITAA97

 

OMG - my head is spinning!

 

Sorry = increase the cost base

 

Tip - DA costs may apply to the new block rather than be split.

 

Phew .
Thanks again Terry for the great tax tip series!

 

So cost base doesn't reset to market value at the time you split the property? Didn't realise that...

 

Splitting is not a CGT event.

 

Thanks terry great tip.

What about if you purchase a block with an existing house (rent the existing house out straight away), subdivide the block and build a new place and live in this as your main residence. I assume this then becomes your PPOR? Same rules apply?

 

The new one could become the main residence after you move in, but prior to that it was rented so the main residence exemption couldn't apply from the date of purchase.

 

Is there anything in particular you need to satisfy to apply to the new block? The ATO example apportions to both blocks

 

Personal tax advice is essential for any project

 

dont forget the trading stock provisions as well. you may not be able to use the main residence provisions if you build a new property on the land that had the main residence and then sell that property without moving into it.

 

Firstly thanks for writing these, i have read a few but its amazing to come across a discussion on a topic we were debating today .

I think I will need to phrase some very specific questions to our accountant, however, a few hypotheticals we are playing with in excel land at the moment.
1) Purchase Land, use as IP for 12 months while plans go through, divide, sell 1, retain other as PPOR.
At the moment in excel i have full CGT for the one we would sell as we can't afford to hold it for any meaningful time so would likely sell during or immediately after. The other one if we sold after 6 years (1 year IP, 1 year build, 4 years living in) i assume CGT would be payable on the 1st years worth of its life only.
2) Purchase Land, not move, divide, sell 1, retain other as PPOR.
Again in excel i have full CGT for the sold 1, and didn't have any CGT allowance in the second business case.

To the best of our knowledge we are not developers in the eyes of the ATO, but from my research, this is an odd gray area.

 

1 - for the second property it would be worked out on a time basis 2/6ths subject to CGT.

2. do you mean you will move in straight away after build?
If not rented it you could possibly claim the main residence exemption from the time of purchase.

This assumes held under capital account.

 

Thanks for the reply.

1. hmm noted, that is risky the value after the build should be quite high. we would miss out on the value add of the development under the CGT.
2. Yes move in straight away. after the build. Interesting, I will keep mucking around with excel and add the scenario to my accountant discussion.

 

Hi guys first time poster but have been reading through the resources for awhile now. I especially appreciate Terryw & Paul@PFI's tax tips.

I know this has come up many times b4 but im still confused S to what tax is payable gst and cgt on my scenario.

Bought the house in the 1980s for 85k. Its been my ppor. I would like to demolish it and put a duplex on the site. With the build costing around 700k with interest payments, da and subdivision costs included. If i sell one and live in the other what tax implications would apply? Im expecting a sale price of 850k.

Your clarifications are appreciated.

Great forum thanks for everyones input i feel like i have learnt alot over the past 6 months from all the knowledgeable members.