HI All First time user of the forum. Just seeking peoples interpretation of the article below with regards to CGT and MRE when demolishing PPOR. My scenario is that I'm looking at subdividing my block which has been my PPOR since I purchased it in 2000 at $262000. This article from an accountants website that I found got my attention as it contradicts a lot of other material with regards to this topic. My interpretation after I read it, is that if I market and sell the two proposed lots and enter into contracts before the demolition of my PPOR (dwelling) and associated earthworks to have titles issued at settlement date, that the MRE still applies. I'm looking at getting conditional approval for the the two proposed lots, which at that point will allow me to market the proposed properties which are yet to be developed. Anyway would be interested in peoples thoughts of the article in particular the bold italic paragraph below.. "When you sell land that you became the owner of on or after 20 September 1985, you must calculate any capital gain made on the sale as part of your income. If that land has a dwelling that you use as your main home for the entire period of ownership, you are then able to apply the main residence exemption to discount the entire capital gain to nil. However some owners mistakenly believe that if the land has been their main residence, it will always have the benefit of the exemption. This is not correct. If the residence has at any time of its ownership been used for income producing purposes, the exemption must be apportioned. This may include if you have claimed home office deductions due to declaring part of your property as being used by your business. Another common trap is to demolish the house. The taxation legislation requires that for the exemption to apply there must be a dwelling. (Note: The term "dwelling" may have far reaching definitions to include semi-permanent structures - consideration will be given on a case by case basis). Demolition of the house is regarded as a CGT event and a deemed disposal of the property. Generally you will not receive any capital proceeds for the demolition, so there is no capital gain or loss. But if you then sell the vacant land, or subdivide and sell the new lots, you must account to the Australian Taxation Office for any capital gain you make on the sale. Because there is no dwelling on the land at the time of disposal, you are not even entitled to claim a partial exemption for the period when there was a dwelling occupied as your main residence you sell. If you are contemplating selling your home as a development site, or undertaking a subdivision and selling as vacant lots, the main residence exemption will only be available if the sale occurs whilst a dwelling that is your main residence remains on the land you sell. Remember that CGT events occur on the date of the signing of the sale contract - not the settlement date, so you can demolish the house after contract date but before settlement date and still claim the exemption. If you decide to rebuild after demolishing the house, the main residence exemption can still be claimed if: you make an election to treat the vacant land as your main residence from the time the demolished house was last occupied by you; AND there is no more than 4 years between the time of last occupation of the demolished dwelling and the time the new house becomes your main residence."
Are you proposing to sell 2 lots off the plan? If so you could only claim one of them as the main residence probably edit - actually you would be up for some tax unless you lived in the completed one for 3 months at least after completion. seek specific tax advice.
Thanks for the feedback. Yes, I'm looking at basically selling two lots off the plan prior to disposing of the dwelling. At this point no demolition of PPOR has occurred. Just seems a bit grey if the dwelling is yet to be demolished and therefore if the proposed lots have the existing dwelling across both then the CGT MRE would apply to both proposed lots at the point of the contract sale. Obviously settlement would be on the completion of demolition, associated earthworks and upon the issue of titles. . I will be seeking specific tax advice but was curious to know how other people interpreted the article.
The article doesn't cover this specific issue. But will you be selling each block under separate contracts to different parties?
Another interesting point from the ATO website regarding Land adjacent to a dwelling which supports my interpretation of the article. It states "the land a dwelling is actually on is included as part of the dwelling and is not part of adjacent land." This would reinforce the fact that the two proposed lots which have been conditionally approved for subdivision, which allows for the marketing of the lots, but have yet to have its PPOR dwelling demolished, would meet the ATO's definition that the land a dwelling is actually on is included as part of the dwelling. The same dwelling which has the CGT main residence exemption and in which the CGT event occurs on the sale of the proposed lots (off the plan) with the PPOR dwelling still in place...
Best not to seek tax advice from the ATO website as it only tells part of the story. It is not the ATO's definition that counts, but the actual legislation.
Potentially yes if there were two different parties interested in the lots. I would of thought ATO's definition would of been driven by the legislation, but point taken and will be having a healthy discussion with my property tax specialist on this.
I would demolish the PPOR as part of meeting all required conditions for the issuing of titles at settlement.
The sale would occur when there was a dwelling in place so my understanding is the the CGT event occurs when you enter into the contract (generally the date on the contract), not when you settle.
I agree with the confusion that surrounds the issue. I regularly advise on this and its important that the site remain a single piece of land and be sold under one contract with a DA for the proposed development. The more you do taints the whole process and you dont want to trigger a CGT event that treats the land as trading stock !! The main residence must be preserved. The extent of efforts to subdivide and sell should be minimised. The house should NOT be demolished or GST concerns will occur. That said it can be reduced to almost nil if planned well. And you can still lock in the main residence exemption so its not drastic. Also the site should not have any fencing erected to separate the house and the adjoining proposed second lot. Ideally sell as is with the DA I think you are on the right track. I would generally suggest you utilise a good property savvy accountant and many say they are but lack the experience with the fine details. Its the little stuff that can bite in this example. If you market a cleared lot you may achieve a slightly (!!) higher price but with GST and a range of other issues you may be worse off. You want a REA to market this lot as a "ready to develop" site. Legal advice on your contract is also important. Tax advice would address if there is a concern requiring a binding private ruling.. If its basic issues there should be no need..
Is there a WA tax issue that requires them to be in WA ? We have clients in USA, UK, China, HK, NZ etc ....and even one in Svalbard (its on the edge of Google maps !!) ........The days of accountants waiting for clients to walk in are long gone. Old fashioned. I would use a good property tax adviser and disregard where they are.
