My wife and I own our current home, purchased in 1982.
We have just purchased a block of land down the coast (May 2013) and paid cash.
We plan to build a house on the block within the next 12 months, and will use this as a weekender or for holidays over the next several years. It will not be rented out. We will need to borrow some funds to assist with the building cost.
When I retire, possibly in 6-7 years, we will likely sell our current home and move permanently into our coastal residence, thus making it our primary residence.
Is there any capital gains tax issues I need to be aware of with this plan or will it not be a problem due to the home becoming our primary residence at the time?
Firstly you current home is a pre 1985 asset so it would be a shame to ever sell it as any capital growth will not be subject to tax while ever you are alive even though it is not covered by your main residence exemption.
If a property is your home at your date of death then your heirs inherit it at the market value at the date of your death regardless of how much CGT you would have been liable for had you sold it while alive. If they inherit it at the market value at the date of your death then they are only going to be liable for CGT on capital growth going forward, not any accrued in your life time. Further they will have 2 years in which to sell it with still no CGT. The same will apply to your old pre 1985 home if you still have it by then, without the necessity for it to be your home when you die. The new “holiday home” will still be considered your home at date of death even if it is rented out at that time and you are in a nursing home, providing it has not been rented out for more than 6 years since you moved out. On the other hand if at the time you die you are using part of it as your home and rent out the other part it will not qualify for this concession.
If this is your retirement home CGT may never be a problem but just to keep your options open I would like to suggest a strategy that will mean that the new land is fully covered by your main residence exemption, even before you build.
Section 118-150 allows you to cover vacant land with your main residence exemption providing you build a house to live in within 4 years of purchase and you move into that house as your home immediately after it is finished. This is the problem, is it possible to relocate to the new property, set up home there, your family live there and if necessary you may have to sleep at the old house 4 nights a week to attend work?
It is not so much the tax saving but the record keeping consequences. If you do not utilise section 118-150 you are going to have to keep records on the property for the whole period of ownership so they can be apportioned (on a pro rata basis, there is no specific allocation of expenses on the basis of date incurred) between the time covered by your main residence exemption (after you move their permanently) and the period not covered. This whole nightmare and CGT can be avoided by simply moving into it as your home as soon as it is completed. If it is your intention when you move in to make it your home and then if the travel gets too difficult and you move back to the old home you will still be entitled to use section 118-150 to cover it retrospectively and then 118-145 to continue to cover it with your main residence exemption after you move out.