CGT and main residence exemption when subdividing

Hi

I was wondering about the rules regarding CGT main residence exemption in the following scenario.

Buy a property, move in and claim as your main residence.

Then subdivide and build a new home on the subdivided block.

Move into the newly built home and claim as your new main residence.

Sell the original home on the original block immediately after moving into new home.

I believe selling the original home would not be a CGT event because it was the main residence.
However what about if i sold the newly built home after a few years? Since i have only had one main residence at a time, do i pay CGT on selling the house on the subdivided lot?

All the examples i see online show subdivision and selling the subdivided block-which triggers CGT. But (i think)this is a different example as i only have one main residence at a time(+ a block of land for the build period)

Any advice would be much appreciated.

 

I answered this exact same question here a few weeks ago.

Yes, the second property would trigger CGT (assuming on capital account) because it only becomes the main residence once you live in it.

 

Thanks Terry. I will find the post you mentioned.

Just to be clear, I intend to move into the newly built property for a few years. So it would be my main residence. Does that still trigger CGT

 

Yes

 

Thanks very much for your quick response Terry.

So do people who own an existing house as their main residence and purchase a block of land in a different location(such as a new estate) to build then get hit with CGT when they eventually sell the new house they built (say 10 years on)on the block of land they purchased because they owned a existing house at the same time as purchasing the land?

Even though they sold their existing house at the completion of the build 10 years ago to move into the new estate house. Essentially moving from one principal residence to another.

Just trying to understand

 

Just think of the undivided land as 2 lots.
Lot A contains a House
Lot B is vacant land

You have lived in lot A and the house so the main residence exemption could apply.

But you haven't liked on lot B as a main residence because it is land with no dwelling. However if you build and live in that house just build for at least 3 months then you could count the main residence exemption on the vacant land for up to 4 years prior.

But you can only claim one main residence at any one point in time.

 

So anyone moving onto their 2nd home gets hit with CGT when they sell their 2nd home because they chose to build instead of buy a existing 2nd house. Unless they dispose of the existing house first so they have only 1 principal place at a time. Even if their intent when building was to move from one principal place to another. Thats crazy...

 

That's fair. Other people only get one property exempt from tax.

Besides the CGT may be minimal and possibly nil on the second property because of the ability to increase the cost base with most expenses incurred while living in the property such as interest.

 

The tax sting in such an arrangement occurs if and when the new home is sold. If thats your plan you could have a larger issue than just CGT.

If its sold within a short timeframe it could be argued any profits arent subject to CGT but ordinary tax and even GST could apply to the sale of the new build (it is new residential premises after all).

That land involved in that sale would have a backdated CGT trap. See its "cost" is a share of the original land purchase price in most cases. A valuer needs to split the two lots and apportion the original purchase (incl legals and duty etc) into the two lots (one vacant land and other land + house). The main residence exemption doesnt apply to the new land until you move in and occupy it. The rule about backdating the main residence exemption to the land when your build wont apply if you move from old house to new house since you arent allowed to have two main residence exemptions at any one time. So you could also have a further year of time that is determined as taxable before the exemption starts on the new land and house.

So selling the new build will come with a tax issue that will never go away.

Its well worth personal tax advice to ensure that GST and tax issues are very clearly determined. A simple change of mind and selling off the vacant land can trigger other issues too. You need to understand the options.

 

You could choose to partially claim exemption to the old house being sold so that from the date you commence to use the vacant land for the new dwelling the old house chosen by you NOT to be your main residence. The old house would have a partial CGT issue but itn would leave the vacant land and the new house eligible for s118-150 provided you move in and then live in it for 3 months..... meaning it would eventually be a 100% CGT free property when it is sold.

There is also a benefit of you moving out of the old house when the land is cleared and held ready for the build. Move out and rent the property and s118-192 is triggered. And the main residence absence rule kicks in...So no CGT on the old house. You could end up with both properties CGT free in time...BUT you will have to rent for a period of time prior to selling the old house. The rent may also outweigh the tax savings

When the numbers are run you may even find you can claim deductions for ownership costs in the period after the old house and land exemption ceases

Hope this demonstrates the benefit of asking the right questions. Pay for good advice and you may find a legit solution or two

 

Wow.Great advice and it shows the myriad of options. Ill investigate all in detail. Thankyou.

Ive taken a good look at this, and i think i have a plan, but i would like advice.

Purhase house 1 on the double block as main residence exempt from CGT
Register the titles just before building on the secondary block of land. This triggers CGT day 0 for the land. Maintain existing main residence as principal residence.
Build takes approx 9 months
Sell existing main residence as principal CGT exempt.
New built house will become principal from that point forward. Since you can have two principal residences for up to 6 months, you can backdate the date the newly built residence as your principal for tax purposes.

Which means only 3 months of CGT applies(9 month build minus the 6 months where you can have two residences.)

Now from what i understand, if i sold the newly built house after 2 years, i would claim 3/24th of the CGT. Plus the 50% discount. So essentially 6% CGT instead of 50%. All legit under the existing rules.

Is my logic sound?

 

No

 

That my friend is where I draw the line. PC isnt where I give advice sorry. A number of errors are evident

 

Thankyou both. This is more complex than i envisioned, so its time to get some advice. Paul, you have given me a few potential options so i will get in touch shortly.