Details of the CGT Calculation When Subdivide Sell Off Old Home and Build New Home

Question

Subdivide PPR, Build on New block…eventually selling New PPR & CGT.

1) 2015- Purchased PPR for $600k
2) 2020- Subdivided PPR (Old PPR worth about $850k, Vacant Block approx $450k).
3) 2021- Commence Build new PPR on Subdivided Block, at cost of $250k.
4) 2022- Sell Front/Original PPR (CGT Free), move into completed New PPR built on new Block.
– Move into New PPR (assume move in days after settlement)
5) 2027- After living in New PPR for 5 years+, Sell PPR or $1.2m.

Assumptions:

a) On the sale of Original PPR, I “expose” the rear block for CGT.

Let’s assume Sale date of 1st May 2022.

Let’s assume move into new PPR on 31st May 2022.

b) I can cover the New house with PPR status, after ceasing to use “original” house as PPR.
c) I can declare the Vacant Block as PPR, as along as I build a PPR on it within 4 years.
d) I would like to insure that the CGT I pay is only for the period prior to covering with PPR Status on 31st May 2022.
e) I assume that the CGT liability & Cost base will be dated from “Original Price of Purchase”,
f) The cost base will be a reasonable apportioning of OPP.

I have a two part question:

Question 1:
How is the CGT Calculated, specifically, what action, decision, declaration of mine triggers or locks in the moment when my newly built house is covered by PPR, and how is that valuation established (at the time) for later (eventual sale) calculating Value in CGT calcs.

The reason I ask is that the valuation on Vacant block may be $450k, however a valuation on “moving in” to new house maybe $750+k (min) and maybe as high as $900k.

That is potentially a big difference in CGT Calcs and will likely have impact on When I sell old PPR, move in, get valuation etc.
I would like to be quite sure that when I sell the new PPR for $1.2m or $1.5m in 2027 or whatever, I only Pay CGT on a value prior to “covering with PPR”.

If I do need to get Valuations, what is the best kind- Bank, sworn, Real Estate Agent, Council etc etc?

Many thanks for your help and your awesome website.

Answer

This question is a follow on from https://taxquestions.com.au/subdividing-and-build-a-new-home-then-sell-off-old-one/#more-1339

In point 4) I gather you really mean move in days after building completed ie certificate of occupancy. Or on second thoughts you may be saying move in within days of settlement on the old house. Well that is not the point section 118-150 (3) specifically says

You can make the choice only if:

(a) a *dwelling on the land that you construct, repair or renovate becomes your main residence (except because of section 118-147 ) as soon as practicable after the work is finished; and

Re point b) a finer point I didn’t go into in the last question. You will be entitled to cover both properties with your main residence exemption for the 6 months before settlement of the old house section 118-140. If you want to sell the old house completely CGT free yes you will have to cover it with your main residence exemption up to settlement but you can be covering the new house at this time as well, providing you do not end up renting out the old house. Messy section 118-140 best to read it. https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-140 The idea would be to move into the new house as soon as it is finished so you can utilize 118-150 backwards for 6 months. But do not rent out the old one so that it can be covered by 118-140, just make sure you get a sale in under 6 months so best already have it on the market.

Now the next section of interest to you is 118-150 (the 4 year rule) https://www.ato.gov.au/law/view/document?DocID=PAC%2F19970038%2F118-150&PiT=99991231235958 this can be used in conjunction with 118-140 and can cover vacant land and the construction period as long as you move in as soon as practical after completed. The important thing here is you cannot cover another property during this time other than for the 6 months allowed in 118-140. So if you are going to live in the old house right up until you move into the new house. You will need to leave your main residence exemption on the old house until settlement and just do what you can with the 6 months overlap rule, section 118-140.

Regarding d) it is going to be a pro rata calculation based on number of days covered to number of days not. So you calculate the capital gain for the whole period then apportion it. This is why keeping receipts for the time it is covered by your main residence exemption will actually, proportionally, decrease the capital gain for the period it is not covered.

A registered valuer is the safest approach and what you are asking them to do is apportion the original price you paid between the value of the old house and smaller land and the vacant land. The value given to the vacant land is your first element of its cost base. Then you would apply half the subdivision costs to each property. Though if say there is a cost to only put water onto the vacant land then you can increase its cost base by 100% of that. Likewise the cost of the new shed will be added to this cost base as the valuation split would only have taken into account the old shed. Even if you have to pull the new shed down to build the new house it does not matter because at the time of building it, it was intended to improve the value of the property so that still stays in the cost base. Of course you add in the cost of building the new house. But the fun starts with the holding costs. Rates, interest, insurance, cleaning materials, plants, lawn mower fuel etc. Right back to the time you first purchased the property. So you may have a portion of the interest on the original borrowings. Use the ratio set by the valuer. Also a portion of the rates. Maybe a very small portion of the insurance because it does cover you if someone was injured on that land. Also mowing, fencing……. Right through for the whole period of ownership ie 2015 to 2027

Now specific to your question – what action, decision, declaration of mine triggers or locks in the moment when my newly built house is covered by PPR

The calculation is all about counting the number of days not covered and number of days covered. To sell your old house completely free of CGT you have to give it your PPR up to settlement date but section 118-140 allows you, when counting the days regarding the new house, to move 183 days from not covered to covered for the 6 months overlap rule. The rest of the calculation is the whole capital gain from 2015 to 2027 apportioned according to the day count.