Main residence exemption on vacant land

Hi all,
Turning to the brains trust for some help on this one...

My wife and I bought a place in July this year and have to live in it for 6 months to get our first home owner grants etc. During that time it has appreciated significantly. We are planning on moving out after the 6 months is up and renting it out.

We have some cash in the bank and are looking at buying a vacant block and building, then moving into it for a year, then renting it out for a while (say 5 years).

We have to live in this place until January next year in order to keep our grants and stamp duty exemptions.

I am aware that if we buy vacant land then we can treat it as the maintenance residence for 4 years before we build on it.

My question is - can we buy vacant land now and then only treat it as our main residence once we move out of here in January?

How will the four months between now and January be treated when we sell it with a house on it that we have built and lived in as our main residence - will it be the same as when you buy a house but rent ir out before moving in I.e. we will not be entitled to a full main residence CGT exemption but rather will have it pro rata based on the time lived in versus the time rented out?

The reason why I’d like to buy now is that the market is very hot and I feel I’ll be paying more if I buy land in January, rather than now.
However if this will be offset by having to pay extra tax when I sell it, rather than no tax, then I’ll just wait.

Thanks for your help all

 

yes

If you cannot claim the full exemption on it then you would need to apportion the period it was/wasn't a main residence at the point of sale.

 

BOTH properties may be eliigble for exemption (although not usually for any of the same days) and it depends what you do with the former home. You may list it for sale aftre oving out and find its sells quickly and then BOTH may be exempt. If you keep it you may choose which is the one that is exempt for the initial period. The choice about exemption can be deferred until the earliest sale occurs.

If the former home is rented s118.192 may apply which would make the old property exempt up to the date it first produces income AND reset the costbase. Generally it can be beneficial to do that then to not use the backdated exemption on a new build. This means the new property has no taxable portion. You are also ignoring third element costs. If pro-rata CGT applies to property you can add in the non-deductible ownership costs for the WHOLE PERIOD of ownership when you live there. It reduces the overall profit before any % is determined. However you cant use the third element costs if a costbase reset occurs.

 

Great, thanks so much Terry and Paul. You were the guys I had in mind. Sounds like we’ll be waiting until our 6 months in House 1 is finished, then we’ll reset the cost base, rent it out, and then buy a block. Then we’ll build and move in to House 2 and make it our main residence so we get full exemption down the track. Quick question - could we possibly buy a block now but do a delayed settlement, and only settle on it in Feb? Would this allow us to essentially lock in todays prices but then be able to claim full main residence exemption on it because we only settle on it after we stop using House 1 as our main residence? (Assuming we can find a willing vendor of course)

 

The 4 year rule "backdates" the CGT main residence exemption in the example when land is acquired "today" and then in the future the build is completed and then the property commences to be the owners main residence for AT LEAST three months. However other property cant also be exempt as the main residence for those same dates. This allows a fair degree of scope to "land bank" the vacant land.

Generally vendors wont defer settlement unless its unregistered land. The delay in it becoming registered will assist but then the contract usually stipluates you must settle within 60-90 days of it being registered. . Many new land developers also have time limits on when construction must start or be completed. The issue of loan approvals for land + build is more complex and a broker may assist.

 

I am wondering about our case. PPR for many years, bought a vacant block of land and immediately engaged a builder to build a house. The build is taking ages, will be 18+ months to finish and we will move in as our PPR (as soon as we can) and then sell our old home. I do not wish to pay CGT for any reason. In the time since our block purchae, the adjacent vacant block next door to ours sold at a $7k increase and our current PPR has also appreciated in value. I don't wish to seek 4 year back date rule, so what applies?

 

If you don't want to use the 4 year rule because you are counting the other house as the main residence then the new one can only be the main residence once you move into it. That will mean you will be subject to CGT if you sell and it will be worked out on a proportionate basis.

 

That isnt quite correct. Vacant land can NEVER get the four year rule. However AFTER construction and occupation for the minimum period of time the exemption CAN backdate, subject to not claiming other property as exempt in that time period. The other property could be subject to proportionate CGT based on numbers of days. There is also a overlap period of 6months that could apply if the former home is sold where you can count both. Thats easily missed.

 

$7K isnt a major number when CGT is involved. You may be overthinking it. Its a common issue and a issue a personal tax adviser should be able to explainand guide. You may even have a need to retain very precise records of all costs to eliminate CGT concerns. In 20 years time if you find out what records you failed to keep it could be too late. The tax savings could in themselves be more than $7K.