Subdivision/Sale of Parent’s Home Before/After Passing.

Question

Hi. Thankyou for the opportunity to achieve some hopeful clarity on a confusing situation during a difficult time. My father now resides in a high-care dementia facility and I feel he may not last out the year. His family home of 50+ years is currently vacant, and somewhat derelict, so, unrentable in it’s current state.

I have Enduring Power Of Attorney and have thus been looking at selling his home. The house is on a corner block in an inner-western suburb of Adelaide. An agent has quoted me a figure for the house for, basically, land value. However, his block now seems to qualify for subdivision into 3 smaller blocks of about 300m2 each. The agent would like to help submit potential plans for three possible homes on the blocks to council (which I am not going to be building. They’re a guide only.) The figures achievable for 3 blocks, minus demolition and subdivision costs, seem far more attractive than selling the house alone (to a likely developer).

I don’t wish to be a developer but merely realize the greatest value of the asset that is my father’s home. If subdivided now, all blocks would still remain in Dad’s name. The property/s will pass to my brother and I after Dad passes, and my brother is happy to sell/subdivide as well. (Sadly, Dad no longer remembers his home.) If I were to apply to council for subdivision now and receive it, but not sell any of the blocks or demolish anything until after they pass onto my brother and I, how will CGT be determined? Am wondering how "timing" works in this instance. Would the three blocks pass onto us without a tax penalty as part of a deceased estate? And, what would the tax ramifications be for Dad if I subdivided and sold the 3 blocks before he passes…if that were still possible? Does GST play any part at all when it comes to reselling assets as part of a deceased estate? I have met with Centrelink and discussed the ramifications for pension and care-fees with them as well. My head is spinning..while my heart is breaking.

Thanks for any advice.

Answer

Talk about the $100,000 question. That is probably what you have just saved in tax by asking this! The short answer is do not demolish the house until after your father has died. You should still try and get approval for the subdivision before he dies because your cost base will be the market value at the date of his death and the valuer is allowed to take into account the potential of the property but only as it would affect the selling price as is.
Here is why you are not to demolish the house, section 128-15 http://law.ato.gov.au/atolaw/print.htm?DocID=PAC%2F19970038%2F128-15&PiT=99991231235958&Life=10010101000001-99991231235959
Only pre CGT assets and the deceased’s dwelling are inherited at market value at Date of death. This property is considered to be two separate assets in your father’s hands half is still a pre CGT asset but the half he inherited from your mother was acquired by him in 1991 with a cost base of the market value at your mother’s date of death. So for this half to pass to you at market value at date of your Dad’s death there still needs to be a dwelling on it that is considered his main residence.
You are entitled to use section 118-145 to cover it with your Dad’s main residence exemption in his absence and because it is not earning income the period that it can be covered is not limited to 6 years. It is an infinite period. The only condition is that it was not used by your father to produce income when he last lived there.
This should work well for Centrelink too. GST should not apply because you obviously didn’t buy the property with the intention of reselling at a profit, you inherited it and are merely realising it in the most attractive way. You are right to not build the houses, that would be considered a change from merely realising an asset to being in business.
One more trap to watch out for. If you are considered to inherit the property at market value at date of death then you are also deemed to have acquired it at DOD so you will need to keep the property for another 12 months and 2 days at least (date of signing of contract to sell) to qualify for the 50% CGT discount. Gives you plenty of time to demolish the house
I would like you to read my How Not To Be A Developer Booklet http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf to make sure you don’t fall into any traps that would deem you to be in the business of development as this would mean you would have to charge GST and pay normal tax on the profit, no 50% CGT discount.

. .
Have a question about tax you need answered?

. Ask your own tax question here for only $79.95