Ask Ban Tacs Question
My land where I live could be subdivided into 2 separate side-by-side lots but the problem is that my house is “in the way,” as it sits in the centre of my block.
If I demolished the existing old house, built a new home on ONE block and move in to the new home, could you please advise how capital gains tax might be factored in, regarding the new PPR? I am not sure if CGT liability on the land under my new home would exist and if the new home would not have the benefit of full CGT main residence exemption. I understand that CGTax would need to be paid in relation to the sale of the spare block but my main concern relates to the proposed new home.
I have lived in my current home for approx 20 years & the original cost base of the land only (not including the house itself) was approximately $200K at purchase.
I understand that I should first RENT out my current home, so that the cost base can be reset. A valuation of the land would be necessary at the start of the tenancy. Reset value might be $1mill based on todays values (land only) The cost to build a new home would be $300K.
If I sold my new home in 10 years time for say $1,525,000 how might capital gains tax be worked out? (based on figures above) I am assuming that GST would not need to be paid. Would it be important (re CGT,) to build the new home soon after subdivision occurred and move in quickly? (ie not leave the land vacant for long.)
If i sold the spare block after 12 months for $720K, I believe that capital gain would be estimated approx as :$720K – $570K = $150K capital gain.
$570K is: $500K reset value + $50K (half subdivision cost & other costs) +$20 solicitor/agent fees. Thus tax would need to be paid on $75K ( ie after 50% CGT discount is applied to $150 CG. No GST would need to be paid.
If in fact a large CGT liability is applied to the land under the new home, could I live in it for a year, rent it out for a year and thus reset the cost base? Would this resetting of the cost base then eliminate any existing CGT liablity existing on the land under the new house? Probably not. (??)
As an after note: I could slide/relocate my current old home onto one block and continue to live in it, in order to preserve my main residence exemption re CGT. CGT would only apply to the sale of the spare block as per above example. I may choose this option if building a new home means I have a huge CGT exposure, on my new home. I have to weigh up all pros and cons. I am not asking for tax advice in relation to this scenario.
Answer
Demolishing and building a new one used to be the answer but the ATO has withdrawn ID 2003/232 http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2003232/00001. Its very existence in the first place showed that the law doesn’t allow you to cover, with your main residence exemption, a home that no longer exists at the time you sell. The withdrawal does not appear to be because the ATO has changed their mind but if you look at the replacement document it does not address the issue specifically.
The resetting by renting out will not work. The ATO is of the opinion that this section 118-192 ITAA 1997 will only work when you actually sell the dwelling that you rented out. If that dwelling is no longer there then it is as if no reset ever happened. This is a strict reading of:
(a) you would get only a partial exemption under this Subdivision for a *CGT event happening in relation to a *dwelling or your *ownership interest in it because the dwelling was used for the *purpose of producing assessable income during your *ownership period
that is the first condition before anything else can apply. A CGT event needs to happen to the house that was rented out. A CGT event is basically a sale.
So getting down to your situation. Moving the house and continuing to live in it will be fine because it is still the same dwelling, you are allowed to renovate it as much as you like. If you choose to build new then you really need to apply to the ATO for a private ruling that they would allow the two houses to be treated as if they were the one house. If they don’t agree then you are looking a losing your main residence exemption on all the capital gain made to date. There maybe too much at stake and you will choose to instead move the old house.
It sounds like you built the original house, even if you demolish it and choose to suffer the CGT you will be allowed to include the cost of building that old house in the first place and demolishing it in your cost base.
I am just so glad you asked this question, losing 20 years main residence exemption could be a very costly mistake.
Can I suggest that if you really do want a new home that you move the old home onto one block and live in there, later building a new house on the other block to eventually move into as your home. There will be a sleeping CGT liability on that new home because the land would not have been covered by your main residence exemption before the new house was built but at least you utilise your full 20 years on the old house. Note if you go for this strategy you will have to keep records for the whole time, from 20 years back to when you sell the new house. The cost base can be increased by anything associated with the property such as rates, insurance, interest, maintenance, repairs etc it even includes cleaning materials. Further, you can use section 118-140 and section 118-150 to cover the new house during construction providing you move in there as soon as the certificate of completion is issued. You can go back 4 years but I expect that you will want to cover the old house during that time. Section 118-140 allows you to cover two properties with your main residence exemption but only for 6 months back dated from the date you sell the old property. So if you time it well and have settlement organised on the old property for around the time the new one is finished then you can sell the old property completely free of CGT and cover the new property for 6 months before you moved into it.
As long as you are not registered for GST, do not have a development happening somewhere else that you have not told me about and only sell off vacant land or land with an old house on it you will not have to pay GST. Note if you substantially renovate the old home it could be considered a new home that you built with the intention of selling and then GST would apply. You have to do something substantial to every room for that to happen. For example laying new floor boards throughout. Just painting every room is not substantial. If this is an issue please give me more detail on what you intend to do and I can be more specific. BTW your CGT calculation is wrong because the reset can’t apply as discussed above. Even with a more lenient reading of section 118-192 it can’t apply to vacant land, only the block with the dwelling that was rented out on it.
Re living in the new home and then renting it out to reset the cost base to remove the CGT on the land underneath. No. For the reset to apply, up until the date it is rented out the property must have been 100% covered by your main residence exemption. The only reset that is going to redeem land exposed to CGT under your new home is for the property to be your home when you die. Then your heirs automatically inherit it at market value at DOD section 128-15. Not much good to you though.
