Our situation is such, we purchased an old weatherboard home in April 2009 planed to build a stock home on it to move in and then sell our PPR to pay down the loan. After engaged the builder, knocked down the weatherboard house in May 2009, we changed our mind in July 2009 to develop the block instead. With lots of up and down, we had to sell our home last year in August 2010 and settlement took place in Jan. 2011. We recently have the town planning permit to build 3 townhouses on it. We plan to move into one ( call it Unit A), sell 1 and rent out the other once constructions complete, hopefully by end of 2012
While we’ve been renting since sold our home early this year, we have just purchased one, settlement will be in September 2011 (call it property B), we’re planning to move in. We however still participate in moving into Unit A once construction is completed in the end of 2012.
My question is, if we purchase the above property B and make it our PPR, once construction of the units are completed, we move into Unit A for a year before selling it, while property B is then a rental property. Can we then claim Unit A as our PPR when selling the property or what would the tax implication be? . And what if after selling Unit A, we decide to move back to live in property B again, what are the tax implications be on property B if we decide to sell it 5 years later.
With the above facts, what would be best for our situation, should we be better purchase property B as PPR or rental property if we would like to claim Unit A as our PPR for a year before selling it.
It is not just your main residence exemption you need to worry about. If you build any of these properties with the primary intention of profiting from their sale then you have to register for and charge GST, further part of the gain will be subject to normal income tax ie no 50% CGT discount.
I suggest you read our how not to be a developer booklet which is in the freebies section of the web site.
You are only going to be able to claim one property as your main residence at any time. There is a small window of opportunity to cover two properties for six months but it has very strict rules that normally make this a useless provision. The six months dates backwards from the date the first property is sold so cannot be used if you are going to keep the property, further the first property cannot be used as a rental in the 12 months before you sell it.
Once you have lived in a property you can cover it with your main residence even if you move out, section 118-145, but only for a period of 6 years if it is rented out.
Section 118-150 will allow you to cover a property with your main residence exemption for up to 4 years before you move into it if you renovate or build but the property cannot be lived in by anyone else during that time ie a tenant.
The only way you can completely cover property A with your main residence exemption is to expose the property you sold, in Jan 2011, to some CGT. And then only if in reality you did not really build property A with the intention of selling it. The CGT on your original home would be calculated on a pro rata basis. The period from when you purchased the development block till Jan 2011 would be exposed to CGT except for 6 months if the overlap rule applies. If all capital gains are equal this would probably be the best way to utilize your main residence exemption because at least you get to cover two properties for 6 months. But in reality it is a matter of looking for ways to cover the property that will give you the most capital gain. Unfortunately, you will need to decide on whether to cover your original home or not before you complete your 2011 income tax return.
As for property A verses property B you will have to choose between the two, cover the one with the most capital gain. Except for the limited 6 months over lap rule there are no clever tricks to cover both.
Record keeping and crunching numbers are how you are going to minimize your CGT. Be aware of section 110-25(4) which allows you to increase the cost base of properties purchased after 20th August 1991 by any costs of ownership that have not otherwise been claimed as a tax deduction. When the property is your own home this includes, but is not limited by, interest, rates, insurance, repairs and maintenance. Even think about light globes, lawn mower fuel and cleaning materials. It may well be that the property you live in has such a high cost base that it is better to cover another property with your main residence exemption.
Note you cannot cover a property with your main residence exemption until you have lived there except in the circumstances covered by section 118-150 explained above.
All references refer to the 1997 ITAA