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Hi Julia.
I have a client who purchased a house in Aug 2008. Upon purchase they moved in straight away until they left the house in Jan 2012 from which time it was rented until sold in March 2016.From the time they moved out they rented another property until July 2016 at which time they moved into a newly constructed house on an 11 acre block of land that was purchased in March 2015. My clients spouse did not own a house at anytime my client has been married to them.
My point in writing is (correct me if I am wrong) is that we can claim the PPR exemption on the house purchased in Aug 2008 and sold March 2016 however the new house would only have a partial exemption based on the number of days owned accounting for the crossover. What I am thinking I need clarified is, as vacant land is not subject to any PRR exemption how is the capital gain calculation done (when the new house is sold) considering that the vacant land was purchased first and the new house that becomes the PPR was built and moved into. Thanks for your help.
Answer
Assuming there is no doubt they are going to claim the full main residence exemption on the Aug 2008 house. Then section 118-150 1997 ITAA (4 year rule) is very relevant to them. Note the six months overlap rule cannot apply because the house that was sold was rented out.
The main residence exemption only applies to the dwelling and 5 acres so you have another 6 acres exposed to CGT right from the start. Other than the land directly under the house you can choose which 6 acres is exposed to CGT even one square metre at a time. Ideally if they can run a business on the 6 acres and utilise the small business CGT concessions that would be great. If they have trucks spread them around. May be even primary production of cattle. Alternatively, there may be 6 acres of flood zone that a valuer could testify was worthless when they purchased the block and still worthless when they sold it. Also look for areas that they have spent a lot of money on but the benefit no longer shows ie stables they build now that will be dilapidated when they sell.
Now back to the other 5 acres. You can use section 118-150 to cover it with the main residence exemption back to March 2016 when the Aug 2008 house was sold, even though there was no house on the land at that time. I am assuming they moved into the new house as soon as practical after it was completed.
As a couple they only get one main residence exemption.
Now to your specific question. There is no chance of a reset of the cost base on the 11 acres it is all about apportionment. Firstly, look at the price they paid for the land, if all of the property was of equal value then just divide that into 11. 6/11ths is the cost base for the area not covered by the main residence exemption. That will give you the cost base for the 6 acres, use section 110-25(4) to increase that as much as you can. You need them to keep lots of records even slasher fuel. Then when they sell a valuer will need to apportion the sale price into the sqm metres or acres that you choose. It may well be worth spending a day on the property with them to get the most of where you choose to utilise the main residence exemption.
The CGT calculation for the 5 acres is still just an apportionment on days covered to days not. Were you thinking that it seems unfair that the house is caught up in this? May be so may be not if the house gets old. Of course the building cost of the house is included in the cost base for the 5 acres and then there are all the holding costs under section 118-150 even cleaning materials, light globes, rates, insurance, interest, anything associated with the house so good record keeping will really help.
