I do enjoy reading your newsletters and tips.
I am 69, and ceased full-time teaching in May 2014. I have a SMSF into which I rolled my teaching super plus shares formerly in my name.
My former husband and I jointly purchased our family home in 1974. After separation and prior to our divorce in 2003 we reached a Family Court ordered property settlement in 2001 whereby he retained our small farm and I retained our Melbourne inner-east home. The latter has appreciated in value greatly.
My late parents left me sole ownership of a beachside holiday home in 2002. It too has appreciated, but less so.
Since May I have been spending much of my time at the beachside home. My children live in Melbourne.
I have recently commenced a planning application to subdivide the family home (corner) block into a vacant lot at the rear, facing the side street, with the home occupying the remnant corner lot.
My options are to sell the vacant new lot and continue to reside in the old house, or to sell the former house and build a new, smaller unit on the new lot in which I will reside when in Melbourne visiting my grandchildren.
I plan to purchase a larger home near my current beachside home, and then sell the current beachside home.
What are the capital gains tax implications of these plans? Do I need an ATO ruling and how do I get one?
Thank you Claire for reading my articles.
No need for an ATO ruling the law is pretty clear on this,
The family home
You have nothing to fear from subdividing your family home block. Subdivision will not change its pre 1985 status so CGT will not apply when you eventually sell, even if you sell the blocks separately. If you build a house on the back block then it will be considered a separate asset from the land and as a result the house (but not the land underneath) will be post 1985 but as it is the land that usually goes up in value more than the building it should not be too much of a problem. Further, you will be able to use section 110-25(4) ITAA 1997 to increase the cost base of the new house by any costs associated with holding it such as insurance, cleaning materials, light globes etc
The property settlement transferring your husband’s half of the family home to you under a binding agreement as a result of a marriage breakdown will qualify for rollover relief under section 126-5(6). As a result it is like you were the only owner of the property back when you both originally purchased it, so it is still completely Pre CGT.
As there is likely to be little or no CGT on the Melbourne property I suggest you utilise your main residence exemption on the existing beach house. Assuming it was pre 1985 to your parents then your cost base is the market value at the date of each one of their deaths. Just to explain I am assuming your father died first but after 1985 so your mother inherited half of it at market value at the date of his death and that half is no longer a pre 1985 asset, her half on the other hand remained a pre 1985 asset till it passed to you. But as it was not her home at death then the half she inherited from your father comes across to you at the market value at the date of his death. Her half of course comes across to you with a market value at the date of her death. These costs bases of course are increased again under section 110-25(4) with good record keeping. I suggest you look back and try and justify that this property was your main residence as early as possible. Evidence would be where you are on the electoral role, licence etc. The further back you can go the less CGT when you sell this one.
When you buy another beach house make sure you establish that with your main residence exemption right from the start. The idea would then to be able to prove that both the new house on the family home block (if you choose that option) and the new beach house both started out life as your main residences at that particular point in time. This way if you do sell either of them you can choose which is covered by your CGT exemption. It will probably be better to cover the beach house as there is likely to be very little gain on the other new house on the family block but it is worth keeping your options open because there is another trick that could protect the new beach house anyway. It gives you the option of selling all of the family home property with no tax and then, providing the new beach house is considered your main residence when you die your children will inherit it at market value at the date you die so all the CGT that would have arisen if you sold in your life time is forgiven and forgotten Reference section 128-15.
If you still own the family block when you die your children will inherit that at market value at date of death except for the house you build. That will be inherited at your cost base which should be very high by then compared with its value, with good record keeping.
In direct answer to your question
If after subdivision you sell the vacant block there will be no CGT. If instead you sell the old home there will be no CGT.
There is bound to be some CGT on the sale of the old beach house but this can be minimised by digging up all the expenses associated with it over the years and back dating your main residence exemption as far as you possibly can. When you consider buying and selling costs as well, would a demolish and rebuild of the beach house be more economical? Though the downside is that this will mean that your main residence exemption cannot start to protect this property until you move into the new house. This won’t be a problem if it is still your home when you die.