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Hi Julia
We met at the We Find Houses seminar last month. I have a house that I own in my own name, and have tenanted in Adelaide. My then husband and I bought the property in 1997 and then I bought his share of this as part of a property settlement in 2004. I have been living in Brisbane as a tenant myself since May 2010. The Adelaide house is on the seafront and is a large block that can be divided into 2 as many neighbours have done that. I would like to consider doing this in the next couple of years but realise there are lots of tax effects and implications regarding it being my principle place of residence. I may not be able to afford to sub divide and develop the entire block myself and I am considering partnering with a builder by selling him half of the land so that once built he can sell his half.
I am thinking that I may live there again as I plan to retire in 8-10 years.
Looking forward to your advice
Regards
Carolyn
Answer
Carolyn,
You have not made it exactly clear so I just want to point out that I am assuming that you lived in the house from 1997 to around 2010 as your main residence. I am also assuming you are not living as a couple with someone who wants to cover another property with his main residence exemption. Accordingly, the property can continue to be covered with your full main residence exemption under section 118-145. And just to be sure I want you to understand I have assumed you are demolishing the original house. These assumptions all seem to be implied in the question but I want to be sure as if any of these are incorrect it will probably change my answer.
You are very right to be concerned. The main residence exemption applies to a dwelling so once you demolish the dwelling the main residence exemption is lost, under legislation forever. Fortunately, the ATO in ID 2003/232 http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2003232/00001 have allowed a concession that you can treat it the same as if you just renovated the house and utilise section 118-150. The conditions are:
1) The property has to have been covered by your main residence exemption for the full period of ownership up to the date of demolition.
2) You move into the newly constructed house as soon as it is completed and live there for 3 months. This may be a big problem with you living in Brisbane or may be a reason to delay demolition and construction until you retire. Even then it would have to be by 2016 because you are only able to cover a property with your main residence exemption while under 118-145 while you are absent for up to 6 years if it is earning income. On the other hand if you are not charging rent the period is infinite.
3) The gap between houses is less than four years.
4) You do not cover another property with your main residence exemption during this period
If you can’t tick all these boxes then you are going to lose the main residence exemption for all the time you have owned it until you move back into it. Very costly when you think of the inflationary gains.
Further:
If you subdivide at best you are only going to be able to cover one of the properties with your main residence exemption and it must be one that has a dwelling on it that you have lived in. The first element of the cost base of the other property will go back to a portion of the price you paid in 1997.
It gets messy to enter into a joint venture with a builder. If you can find one that instead will allow you time to sell one of the properties to pay their account it will probably work out better. Just think of the stamp duty of transferring one into the builder’s name so that he or she can sell it anyway. The idea would be to pay above market price for the houses in return for more generous payment terms. Offering the builder a caveat over the land as security.
Then there is the GST which may mean that you would make more money by simply subdividing building a home for you and sell off the other block as vacant land. This scenario would mean you would not have to register for GST and therefore not give the ATO GST out of the sale proceeds of the land. If you build a house on the land and sell it there is no avoiding GST (Reference MT 2006/1).
There are many issues here and a detailed history is needed before anyone can advise you the best path to take. I recommend you discuss this with your accountant or skype me so that you can fill me in better on your circumstances and the options you would consider.
