Great Example of Demolish Home and Build Duplex

Question

I bought a house in Sydney with my then husband in June 1997 for $265,000 and lived in it with him until our separation in 2008. I retained the house in the divorce and transferred it into my name as part of the settlement in 2009 (this was not considered a sale). It was valued at about $740,000 and I took out a $200,000 loan against it to pay him out in order to retain it. I continued to live in it on my own (with the kids).

In May 2015 I knocked it down and built 2 duplexes which took nearly 2 years. I still had a $50,000 loan from the old house and I took out another loan of $750,000 for the build. I moved into one of the duplexes (A) when they were completed in March 2017 and still live there on my own (with the kids). I rented the other side (B) out in April 2017 and it continues to be rented. I have not yet registered the Strata titles.

I am wanting to refinance the loans and am also considering having my recently widowed, elderly father live with me but not in my place as it is not suitable for him. I am weighing up my options and my questions are:

1. If I still live in my PPOR (A) and register the strata title, can I split the build loan, currently totaling around $700,00, into 2 new separate loans of $350,000 with each loan using its separate strata title as security for its own loan (perhaps even at different banks)? I would then just claim the interest for the rented property’s (B) loan and concentrate on paying down (A)’s loan? Also can I split the loans like this without registering the strata titling (at the same bank with the one title as security)?

2. Do I have any tax liability if I sell my side (A) that is my PPOR for $1,300,000 (obviously after registering the strata title)? I expect not.

3. What would be the tax liability if I sold the rented side (B) now for $1,300,000 or in a few years? What values are used in the CGT calculation.

4. What tax implications for the future sale of (A) are there if I rent it out retaining it as my PPOR and move into a rental with my father? Does it remain GST free? Do I get to claim any interest for it’s loan in this case?

Thanks,
Amanda

Answer

Amanda,

Askbantacs is normally about 1 question not 4 so instead of my detailed answer, I will give you points on each question so that you can think through your options and then maybe put to me what you finally decide, for checking.

Key Points:

You are considered to have used the property the same way your husband used the property and are considered to be the only owner way back in 1997. That looks to me like it is going to be covered by your main residence exemption right up until the time you moved out to build the duplex, assuming you moved into it as soon as practical after settlement in 1997. I am assuming you have never owned another home. So while you weren’t living there during the build you can use section 118-150 to cover it with your main residence exemption as long as you moved into A as soon as practical after the certificate of occupancy is given. This will cover A with your main residence exemption all the way through but B is completely exposed to CGT right back to 1997 as you can’t cover both with your main residence exemption as they have been treated as two different dwellings even though they are still on the one title, reference TR 1999/69. So the $265k you originally paid will probably be halved (reasonable method is what is required) as the start of the cost base for B then half the subdivision costs and all of the building costs associated with B. Then this cost base is probably reduced by the building depreciation you can claim against the rent.

With loans what the money was used to buy determines the tax-deductibility of the interest, not where the loan is secured. TR 2000/2 https://www.ato.gov.au/law/view/document?docid=TXR/TR20002/NAT/ATO/00001 at paragraph 18 describes how to split a mixed purpose loan. Best to organize two separate loans for the exact right amounts and at exactly the same time pay off the original loan by drawing directly from these new loans.

Note generally an amount borrowed to pay out a spouse on relationship breakdown is not considered borrowed to buy the property but a personal obligation so that loan that appears to be $50k now is probably not tax-deductible at all.

1. If I still live in my PPOR (A) and register the strata title, can I split the build loan, currently totaling around $700,00, into 2 new separate loans of $350,000 with each loan using its separate strata title as security for its own loan (perhaps even at different banks)? I would then just claim the interest for the rented property’s (B) loan and concentrate on paying down (A)’s loan? Yes there is a good precedent for that in TR 2000/2 paragraph 18 no worries about where secured or which bank.

   Also can I split the loans like this without registering the strata titling (at the same bank with the one title as security)? This is more at the pointy end. There is an old case with a daycare centre and home on the same block so you might be ok. If you don’t want to split the title it is worth going to the pointy end as it won’t make you any worse off.

2. Do I have any tax liability if I sell my side (A) that is my PPOR for $1,300,000 (obviously after registering the strata title)? I expect not. No CGT if covered by your main residence exemption all the way through
3. What would be the tax liability if I sold the rented side (B) now for $1,300,000 or in a few years? What values are used in the CGT calculation. CGT all the way through with 50% discount of course and don’t forget the depreciation write back. The calculation would probably look a bit like this. 265/2 for land + $375 for share of building costs + x/2 for subdivision costs + selling costs – depreciation claimable while rented = cost base. $1,300,000 – cost base = y /2 for CGT discount = taxable amount.

   Now just be careful here to hold it as a rental for at least 5 continuous years to ensure there are no questions asked about GST, not long to go.

4. What tax implications for the future sale of (A) are there if I rent it out retaining it as my PPOR and move into a rental with my father? Can cover it with your main residence exemption for up to 6 years section 118-145

   Does it remain GST free? It is a question of whether you built it with the intention of selling or to use as your home. Onus of proof is on you. Though you are in a very good position to argue this.

   Do I get to claim any interest for it’s loan in this case? Yes you should be able to trace the nexus between the loan for the building costs and A but as stated above I doubt what you paid your husband will count.