Hi, I have a ppr that I have owned since 1996 jointly with my then husband which we bought for 266,000. We seperated in 2008 and I bought out his share at 740,000 but paid no stamp duty as proceeds of divorce. If I knock down the house and build a duplex and live in one and rent out the other what capital gains would I pay on the investment duplex if I sell it after a year for 900,000? I am assuming no cgt is payable on my ppr half which I will live in. Also is only half the interest on the loan used to construct it eligible for tax deduction even if I refinance to have the loan all on the investment property?
You say you bought out his share but then say that you did not pay stamp duty on the transfer so it sounds to me like his half transferred to you as part of a property settlement arrangement rather than an actual contract of sale. Am I correct in assuming that the transfer happened as part of a binding financial arrangement as a result of a marriage breakdown?
If this is the case then you are deemed to have held the property solely in your name dating back to 1996 and be entitled to cover it fully with a main residence exemption if your husband and you both used it as your home all that time you were married and you have continued to since.
I go ahead now based on this assumption. So your cost base goes back to the $266,000 regardless of the value when your husband transferred his half to you. Reference section 126-5 ITAA 1997.
Generally once you knock down the house the main residence exemption is destroyed with it. But in ID 2003/232 the ATO make a concession that you can link the old and new house together and pretend they are the same house. Providing the gap is not more than 4 years, you move into the new house asap after completion, cover it with your main residence exemption for at least three months, do not cover any other property with your main residence exemption at anytime during this ownership period up to 3 months after construction. Note the concessions in ID 2003/232 can only apply if the property is 100% covered with your main residence exemption from 1996 to the time of demolition. I have included this link to the ID http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2003232/00001 because it is a concession outside the law so every word is important, it is all you have to rely upon to protect this property with your main residence exemption.
Of course you will only be able to apply this connection or bridge (ID 2003/232) to a property that is being used as your home. If you rent out the other side of the duplex then it will not be entitled to any of your main residence exemption. This means that it’s cost base (assuming identical) will start with $133,000 add in holding costs over the years such as its half of interest, insurance, rates, cleaning materials repairs etc Section 110-25(4) and its share of demolition and construction costs. Then there are buying and selling costs but the bottom line is it is all actual costs no reset for value when transferred from your husband. You will be entitled to the 50% CGT discount as the 12 months starts back when you first purchased the property. But note if the ATO considers you to have built the duplex with the primary intention of selling it then you are considered to be in business so will be taxed on the profit as normal income and have to pay GST.
It does not matter where the loan is secured the question of deductibility is all about what the borrowed money was used to buy. For this reason you will not be able to claim interest on any money used to “buy your husband out” that borrowing would instead be considered to be borrowing to pay your obligations under the divorce settlement. If the original borrowings are still intact you can claim half of the interest on them. Note by intact I am questioning whether the nexus has been lost by redrawing from the loan. More about this in our claimable loans booklet or TR 2000/2. Also only half of the interest on the construction loan as only half was used to produce an income producing asset.
If it is your intention to build a property to rent out then you are allowed to start claiming that duplex’s share of interest on the land and construction costs from the time the property is committed to the project and not used for private purposes. Reference Steele’s case and the ATO rental property guide.
Yes no CGT will be payable on your home side of the duplex if the property has always been covered by your main residence exemption and you satisfy the requirements of ID 2003/232.
I think you should check this thoroughly with your accountant before you knock down the house. If you don’t dot your I’s and cross you t’s there will be a huge loss of main residence exemption that would not have happened if you had not built the duplex. Further, if you are considered to be in the business of building one side to sell then you risk losing so much in tax that it may not be profitable.