Rental Subdivide then Both Used as Main Residences

Question

14/5/2009 – Purchased a house and rented out to tenants from the date of purchase. Cost $435,000
29/6/2009 – Settlement date of purchase and related stamp duty and conveyancing fees of $16,632
30/6/2009 – Signed Leasing Agreement with a new property manager
7/1/2017 – Apply for subdivision with WA Planning Commission. Lot 1 with land size 235m2. Lot 2 with land size 533m2. Total subdivision cost was $45,283.
29/5/2017 – Tenants vacated
9/6/2017 -Signed building contract with a builder to build a new home A on Lot 1. Cost $150,850 for the build.
22/6/2017 – independent valuation obtained before old house demolished was $535,000.
20/07/2017 – Old house was demolished. Capital allowance, capital works deductions and low value pool deducted during rental period was $38,254
15/2/2018 – New home A was completed
26/4/2018 – Moved into the new home A and this became main residence. Ownership costs not deductible for tax such as council & water rates, insurance and land tax during construction was $18,230
27/7/2018 – Titles issued for two new lots. Lot 1 is smaller lot with the new home A built with 235m2. Lot 2 is bigger lot and vacant with 533m2. Total land size is 768m2.
16/9/2020 – Signed contract with a builder to build home B on Lot 2.
16/11/2022 – New home B on Lot 2 was completed. Total build cost $450,500
10/12/2022 – Moved into new home B and this became main residence
20/3/2023 – Sold home A with land size of 235m2 for $535,000.
27/4/2023– Home A on lot 1 of 235m2 settled. Agent fees and Settlement cost of $19,296

Questions

Do I calculate capital gain on the subdivision in April 2018 when I moved into home A? If so, how?
2. Do I calculate capital gain on the subdivision in July 2018 when the new land titles issued? If so, how?
3. How do I calculate capital gain on the sale of home A in March 2023? If so, how?
4. Depending on the answer for 1, 2 and 3 above, that will determine how i calculate capital gain on the sale of home B when home B is eventually sold. Please confirm correct.

Answer

I attach a spreadsheet that you should duplicate before you start and use to estimate the CGT on each property. This will help you choose which property you want to cover with your main residence exemption during the period 27-4-2019 and 27-4-2023. Work out the gain on each one and see which one will most benefit from those extra days of exemption during that time ie the one that has made the most capital gain. I am assuming that you do not have another property that you want to cover with your main residence exemption during any of the time you owned this property.

First calculate the cost base up to 2017, the time at which the title was split. Then you have to find a reasonable method of apportioning this between the two blocks. You can do it just on a square metre basis. Alternatively you could use a valuation of the individual blocks at the time and use that ratio to apportion the cost base you have calculated. It just has to be a reasonable method.

The CGT calculation for each property goes right back to 29-6-2009. Contract date is relevant for the 12 months ownership condition of the 50% CGT discount but just about everything else refers to ownership period ie settlement date. There is no reset to market value at anytime during the ownership period as it was not first your main residence. There is no need to reduce the cost base because the old house is demolished. Though of course there will be the depreciation adjustments, explained in the spreadsheet.

Section 118-150 1997 ITAA is the key to your strategy. This allows you to cover the land where you build your main residence for up to 4 years before you live there. Providing no one else is living there. So it cannot start until the tenants vacant 29-5-2017. The question here is which property do you want to cover with your main residence exemption when the 4 years backwards from the date you move in, is available for both properties but only one can be covered. You can cover Property A from 29^th May 2017 because you moved in before the 4 years were up right through until it was sold because you moved in within 4 years. With Property B you only have that option for the 4 years before you moved in so before that you may as well cover Property A

Now there is a 6 months overlap rule that will allow you to cover both properties for the 6 months before you sell property A. Here is a link to the legislation so you can make sure you pass all the conditions https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-140 This effectively allows you to move 183 days from not covered by your main residence exemption, to covered by your main residence exemption.

Make sure you make the most of section 110-25(4) which allows you to increase the cost base of a property by anything that is associated with holding it that has not otherwise been claimed as a tax deduction. So even cleaning materials and lawn mower fuel. The way the formula works expenses during the period that it was exempt under your main residence exemption, proportionally help you reduce the CGT for the time it was not exempt. This is because the capital gain is calculated in full before apportionment.

In summing up:

You need to work out the gain on each property by looking at everything associated with it, not otherwise claimed as a tax deduction, from the day you purchased it.

The costs up to 2017 need to be apportioned between the two blocks

You calculate the capital gain for each block first then apportion it between days covered by your main residence exemption and days not to work out the taxable gain. Offset any capital losses you may have accumulated and then apply the 50% CGT discount.

Other than the 6 months overlap only one property can receive your main residence exemption obviously this should be the property with the most gain, therefore the most number of days that CGT does not apply to. The period you can make this choice is only for the days between 27-4-2019 and 27-4-2023 (4 years before you move into property B). Obviously after 27-4-23 Property B is covered by your main residence exemption.

The subdivision has no affect for CGT purposes (other than having to split your cost base) because the property is still owned by the same people.

The spreadsheet provides a lot of detail on dates and what make up the cost base.