Capital Gains Tax and Subdividing my PPR

Question

I purchased my home approx 17 years ago for approx $200,000.I have lived in it for the entire time and it is now worth approx $1mill. It is possible to subdivide the land into two (side by side) blocks but I will not do so, if I lose the full capital gains tax exemption. Ideally I would like to demolish my old run down fibro home and build a new house to live in, on one block….and sell the second block for anticipated $750K. There is a chance that my home can be lifted and slid on to one block.. in which case I could remain living in the original house/or sell it on the newly created block…but this is not my preferred option(even if it can be slid to one side)If this means I can keep the full CG exemption then I would attempt to do this.(it would be costly to lift,slide,and add elec,plumbing etc services. I understand that if i rent out my home for a while (and have a valuation done) before I subdivide, it may be beneficial in regard to not losing the capital gains exemption. I am not sure which is the best way to proceed.if I did demolish, build a new house for $300K on one block and sell the other block what cap gains tax would i have to pay based on above figures?Would sliding the old house over, selling it and living in a new house built on the second (new) block be a better option? Would it be better to live in a house on one block, sell the home after 12 months and then build on the second block and live in it? I am sorry if this sounds cofusing. i dont know what is best. Thank you

Answer

According to ID 2003/232 http://law.ato.gov.au/atolaw/print.htm?DocID=AID%2FAID2003232%2F00001&PiT=99991231235958&Life=10010101000001-99991231235959 you are not going to be able to cover the land under and around your new house with your main residence exemption unless you demolish the old house. If you don’t demolish the old house you are going to have a CGT liability on the land under your new house on a pro rata per day basis for the period it was vacant land. This still maybe worth it because if you die in you new house your heirs will inherit it at market value at the date you die regardless of how much CGT you would have had to pay if you sold it the day before you died.

Yes you could move the old house to one side, live in it for 3 months and then sell it and the land underneath it completely free of CGT . Though as described above your new house would have 17 years of CGT exposure so if you sold it at year 20 after spending $300,000 on a new house your capital gain calculation would look very roughly like this:
Original cost base say $75,000 half of land value in original purchase
New house $300,000
Ownership costs 15,000 rates insurance interest etc under section 110-25(4) ITAA 1997
Bit of sudiv & selling 10,000 etc
—————-
$400,000 say sell for 1.2mill $800,000 capital gain /20 x 17 as only covered with your main residence exemption for 3 years = $680,000 less 50% CGT discount = $340,000 taxable capital gain which we can pretty safely assume most of it will be taxed at 46.5%

I think your best approach would be to make the property income producing, the easiest way to do this would be to rent the house out or for that matter just part of it out. This will mean that section 118-192 (ITAA 1997) will reset the cost base for the whole property to the market value at that time. Note it also resets the acquisition date so you will not get the 50% discount if you sell the property you choose not to cover with your main residence exemption, within 12 months of the reset.

This new cost base will then need to be apportioned on a reasonable basis between the block you keep and the block you sell. You can also increase this cost base by any expenses associated with the property after the reset date. For example but not limited to; fencing , rates, insurance, lawn mower fuel, light globes and subdivision costs.

Now to cover a property with your main residence exemption you have to sell it with a dwelling on it that you have lived in. Adjacent land is only covered if you sell It to the same person as the dwelling on the same day etc. But at this stage it does not matter that much that the vacant land maybe exposes to CGT as it will have quite a large cost base from the re set.

Relocating or building a new house does not matter. You have no choice but to leave the main residence exemption with your dwelling if you are going to sell the other block as vacant land. If you sell a block with the old house on it then you have the option to give it your main residence exemption as discussed above but there will still be this huge CGT sitting on your new home as a result.

This is really too much for one ask bantacs question so I have given you the scenarios, you sound like you have enough understanding of the issue to work with these. Here is a quick summary

If you are going to die in the new house do the numbers it maybe worth moving the old house across. But what ever you do you will benefit by renting the place out before you do anything so you can reset the cost base. Doing this will achieve what you want ie not lose your main residence exemption up to this point in time.

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