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My wife and I bought property 1 as a family residence in joint names in 1988 price $105000.
The property was transferred into her name for rental/ negative gearing purposes in 1992 and we then bought property 2 as a family residence in her name.
We separated 8/07 and divorced 3/09.
I have lived in property 1 rent free since 8/07.
The Family Law settlement will include the transfer of property 1 into my name and I shall continue living there.
I understand as a result of this transfer there will be a CGT liabilty rollover into my name.
What are my CGT liabilities if
1) I sell property 1 in 2012 price $850000?
2) I sub-divide property 1 in 2012 and sell part eg 400m2 for development price $450000 and continue living in the existing residence on the remainder of property 1?
3) Are there any CGT concessions/ discounts/ relief available?
Thank you.
Answer
Answer:
The CGT rollover relief which is un avoidable means that you are treated as being the one who held the property during the time your wife did. So when I talk about the period between 1988 and 1992 I am talking about her share that is now yours, not your share back then as the CGT event on that has already happened.
It is best to look at the property as two separate assets to make the matter a bit simpler. I am assuming when the property became a rental you, as a couple decided to cover the other place with your main residence exemption. Let’s call the two notionally separate assets asset 1998 and asset 1992 Asset 1998 is half of the house all the way through from that date and asset 1992 the half of the house that your spouse purchased from you in 1992.
Because the property was not first rented after 20th August 1996 you will not be able to utilize the reset at market value rule so the whole gain starting from back in 1988 for asset 1988 and back in 1992 for asset 1992 is taken into account then apportioned for the time it was exempt as your main residence.
So you are considered to have held asset 1998 as your main residence from 1988 to 1992 then it became subject to CGT. This is calculated on a daily basis so if there were 1,000 days between 1988 and 1992 and another 5,000 days before it became your main residence again then there was another 2,000 days that you lived there before selling then rollover relief means that you have owned the 1998 asset for 8,000 days of which 5,000 had no main residence exemption ie 5/8ths of the gain is subject to CGT. The first element of your cost base is half the original purchase price then half buying costs, half selling costs, half improvements etc.
Now the 1992 asset was purchased after 20th August 1991 so section 110-25(4) will allow the cost base to include any holding costs (event light globes, lawnmower fuel rates, interest etc, not otherwise claimed as a tax deduction, to be included in the cost base. Also the market value of that half in 1992 and selling costs etc. The way the formula works is the costs of you living there can reduce the CGT for when you weren’t because you calculate the gain then apportion. In the case of the 1992 asset, using the days quoted above 5/7ths of the gain is taxable because the clock started in 1992 so there are 5,000 days as a rental and 2,000 days as your main residence.
If you subdivide this property and sell off a vacant block separate there will be no CGT main residence exemption because you need to sell a dwelling with the land for this to apply. Now don’t go thinking well I will build one, because you can only use your main residence exemption on one of the properties and if you build a new house to sell you may lose the 50% CGT discount and be up for GST.
With the sale of the vacant block it is still effectively two separate assets for CGT purposes (so now you have 4!) the 1988 asset will need to have the original purchase price apportioned between land value and house and land value. Then of course development costs are added on. Some of these development costs will have to be attributed to the main residence such as half the costs of splitting the titled but things like water connection to the vacant land can be attributed 100% to it.
The 1992 vacant land asset will start with the portion of land value that the 1992 market value was. Etc.
Subdivision in itself is not a CGT event so there will be no need to wait 12months after the subdivision to qualify for the 50% CGT Discount.
This was really two questions.
