Ask Ban Tacs Question
Dear Ban Tacs,
In 1993 I purchased my home in suburban Perth W A in my own name.
The purchase price was $180,000, and since purchase it has been my primary residence.
At purchase I estimate the land value to have been $100,000 and the house $80,000.
The total land area is 760 sqm and the local authority have given me preliminary approval to subdivide 330 sqm of land from the rear of my existing lot, whilst retaining my house.
There is an access laneway at the rear of my property.
There is a large 8m x6m shed on the 330sqm lot that will result from the subdivision.
Once the subdivision has taken place I propose moving out of my house and living in the shed, on the newly subdivided lot, whilst I renovate my existing house.
My house will not be tenanted during the renovations.
I expect to live in the shed as my main residence for approximately 6 months whilst I renovate my house.
The lined shed will have power and water connected and a separate letterbox and street address.
When the house renovation is complete,I plan to move back in to my house and sell the subdivided 330 sqm lot, including the shed.
My Question to you is?
Because at the time of sale I will have lived on the subdivided 330 sqm lot for greater than 6 months, will the sale of this land including the shed, be exempt from CGT as my main residence.
If not what else could I do to become eligible for the main residence exemption?
Answer
Nice! I really like this. Just consider that you are only entitled to one main residence exemption so this strategy will expose your house to CGT right through until you sell the land. Best plan to die there! There is no resetting of the cost base if you eventually sell your home you will just have to calculate the whole capital gain and apportion it between days covered by your main residence exemption and days not. Make sure you take full advantage of section 110-25(4) ITAA 1997, keep receipts for everything even cleaning materials, insurance, rates, repairs, interest, over the whole period of ownership. Also of course keep all the records for the renovation.
You need to consider the big picture in that if you did sell the nicely renovated home one day the capital gain for the first 20 years you own the property might be a whole lot more on the house than the capital gain you protected on the land. But a bird in the hand.
Now to why I think it will work:
In Summers case AAT 2008, the ATO had to accept that a shed even without cooking facilities and a shower still qualified as a main residence simply because the owner lived there, no matter the circumstances.
It would be nice to also prove that you lived in the shed for a while, it helps support the fact that stand alone it can satisfy the definition of dwelling and be a main residence. But my main argument is that the shed is part of the main residence. It was used for private purposes the whole time, whether storage, man cave etc. Basically you are separating the buildings that make up your main residence. It is not a question of where your bed is. You have a choice of which property you cover with your main residence as both qualify but only one can be chosen.
You could argue that you have two dwellings on the land. They could be considered one if sold together but if sold separately then you have a choice. Sure, you only lived in the shed for 6 months in 20 years but the shed was always used as part of your residence. Always for private purposes in conjunction with the home so it is just a matter of marking out where you are going to put your main residence exemption now the home is split in two.
Note if you do die in the home after exposing it to CGT, section 128-15 means your heirs inherit the remaining property at market value at DOD because it was your home at DOD so all the capital gain accrued in your lifetime is forgiven and forgotten.
