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CGT on Knockdown Rebuild – Duplex – Melbourne
Currently I have a situation whereby my mother (50%) / my wife and I (50%) own a property, which is our principal place of residence for all three of us and we do not own any other property. This situation recently arose due to my mother not being able to pay her mortgage due to rate rises so we simply purchased 50% for $500K (at market value), closed her mortgage and moved in.
Now we are considering demolishing the existing house and building two side by side units in the form of a duplex.
Our end goal is for my mother to own unit A wholly and for my wife and I to own Unit B wholly and we would have no interest in each other’s units.
Our dilemma and main concern at the moment is:
- How do we divide ownership of the units for my mother to wholly own Unit A and my wife and I wholly own unit B, without incurring CGT during this process?
The reason we want to split the titles is to A) protect my mum’s unit as it is the only asset, she has B) As my mother is older the bank will only allow for a 20-year mortgage on the construction loan therefore ideally after the dwellings are built, we would like to give her a clean title and refinance to a new 30-year mortgage for our unit. C) It is a lot cleaner for her to have one as it separates her finances from ours going forward. D) She has no potential to offset expenses as she has no income.
Other things to consider
- We do not intend on selling either of the units in the foreseeable future. Our main intent is to live in and own one each.
- As my mother is aging, we may find ourselves in a situation whereby we all live in Unit A and rent out Unit B or vice versa.
There is a lot of goodwill going into this project by my wife and I so the last thing we would want to occur is be stung by unexpected taxes when clearly all we are trying to do is live close to one another.
Answer
Great question so glad you found out there is an issue before you proceed.
If the subdivision is actually a strata then there is a rollover that means CGT won’t be triggered, generally a strata subdivision involves some area of common property Here is the relevant section:
The definitions part of the Act says:
124-190(3)
A stratum unit is a lot or unit (however described in an *Australian law or a *foreign law relating to strata title or similar title) and any accompanying common property
If it is no a strata subdivision then you have a problem in that the clear title will involve a transfer of half of each new title which is a CGT event unless you can claim that you hold that half in trust for the other person ie no actual transfer
Ideally draw up a trust agreement. I have heard that the following solicitor specialises in these arrangements
