CGT Converting PPOR to investment

Hi All
Needing some advice.
I purchased my 3bedroom PPOR in October 2020 for 1.4million in a seaside location in Qld.I currently spend half my time in Qld and other half in Victoria.
I have decided I would like to holiday let our property for the times we are not there on Airbnb.Due to the large block size of 2300m2 in a prime location opposite beach we also have the opportunity to build 3 x 2bedroom units at rear of block and also would like to Airbnb them.
When I purchased the property prices had been stagnant for more than 15years.Since settlement the property has had significant growth and is currently valued at around 2.5million with I believe another 25% to come in the next 12months.After this time I believe there will be little growth for the next 5 years.
My Question is what is the best way to structure to complete this vision without losing the current and prevailing tax free gains I have made when it is time to sell in the future.

 

Totally move out and use the 6 year rule is really the only option. If the home is income producing and you are not absent it cannot be CGT exempt.

 

Where are you living in Victoria and who / what owns that property?

 

Hi Terry
Could we get a valuation done when it becomes income producing and use that as a value for any future capital gain cost?

 

Hi Trainee
Currently renting in Vic

 

If it was at the point of it first becoming income producing then potentially yes

 

Would it be best to subdivide house from 3x town houses at the point of becoming income producing.?

 

if you merely started renting and started subdivision etc very soon after the ATO could well argue the asset changed to trading stock well before the property was first used to produce income.

seen that before.

 

Hi Mike
Could I get a valuation of property now and split base cost between original house and rear block.
Potential come in at 1.8million for house and 700k for rear land .Then subdivide off rear block and sell block to my family trust before I start to build on it.
Would this be a option

 

You could but lose of main residence cgt exemption on the land sold. Assuming capital account

 

I wouldnt assume that because you spend some time in QLD and some in Vic that you can even use the main residence exemption. The wording of the law is the hint. "Main residence". The issue of residing is no particular concern but the main is. Which is your main residence ? Only the main residence can have an absence. When you rent a property each six months the absence rule is a matter you are strongly relying upon and a private ruling would be very wise. Its rare but sometimes taxpayers need to prove the absence also included a expectancy to resume residency to support the main residency view for past flip-flop changes This leaves the possibility of the Vic property as never being a main residence to safeguard the absence rule and resumption of residency.

A thought bubble to consider change use of the land doesnt in itself trigger a changed use. Hence any CGT triggers etc may need a ceassation of the home use and some action that sees the property use change eg council DA, plans etc. I would agree with Mike that the ATO may also form a view that the extra land was held for expected use the whole time and part of the land was never in use for the rental and home use perhaps as so deductions and costbase reset may not apply to all of the land. Retaining ownership of it all and income production may leave the asset on capital account but certainly some apportionment appears necessary.

Its a area where quality property tax advice would be wise.

 

Thanks for info Paul
We currently rent a house in Victoria not own .Our main residence is the QLD property.
I am looking at options how to best to utilise the large block of land our home sits on.
Would the best option be to build a house on rear block for rental and keep on 1 title and if so how would we reset cost base
.Maybe than keeping the original main residence as non income producing.

 

I cant answer this, nobody could with limited information and even then I never tell clients what to do. I can only explain the tax consequences of their choices. I consider some apportioning of the main residence will be involved. Remember when this occurs all past exemption is lost on that part of the land no longer held as part of the main residence. Yes it is retrospective. Its like when people subdivide their resi lot. The new section is treated as if it was never part of the home. However it doesnt produce a tax trigger either. The portion carved off is treated as if it was never exempt. However if the resulting area is kept for income production and isnt sold no CGT is triggered as such. Its deferred. And has its own costbase despite being part of a whole and then apportioning issues continue. Its two CGT assets. This assumes that land is a single title but there is multiple uses of the land. QLD land tax may also be impacted as most land tax exemptions limit other use of the land and this can leave some taxable...or counting towards it. Even on one title. Land tax and CGT rules ofen apportion using use as a basis and also sometimes time is also a factor. Often this can require some valuation basis to assist calculations.

The costbase reset issues would already have been imposed by s118.192 if the property has been rented in the past. Its a single event at some point. Thereaftre its a pro-rata issue for USE and also time with potential for some main resdience up to a point when that will cease. Thats the key issue...when USE as a main residence ceases. eg Its held for costruction of the new build. The vacant land holding period then kicks in. etc Its seems very daunting and it complex advice but it isnt that complex.

 

Thank you for all the advise I will have a meeting with my tax agent to clarify.