PPoR on IP land?

Discussion in 'Accounting & Tax' started by Perthguy, 13th Feb, 2017.

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  1. Perthguy

    Perthguy Well-Known Member

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    For about a year I have been looking for a block to build a PPoR. I haven't found one.

    One of my IPs (owned 50/50 TIC) has a big, empty back yard in a great location. Assume we have owned the property for 5 years and it has been rented continuously for that time. I could build a house there and move in once complete. The existing house would remain on its own title in line with current ownership (50/50 TIC) and rented out. The new house would have its own title prior to me occupying. During this process I would acquire my investment partner's 50% share.

    At the time of moving in:
    - house would be complete with occupancy certificate issued
    - I would move in as soon as complete
    - the house would have its own title
    - I would own 100%

    Since this is going to considerable effort and cost, my plan is to make this a permanent home. I am thinking I will want to live there at least 10 years to make it worthwhile.

    If I do eventually sell though, I was wondering how the Capital Gain would be calculated.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Apportioned and the based on time basis.

    This question was asked last week here too
     
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  3. Perthguy

    Perthguy Well-Known Member

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    Were they retaining or demolishing or does it not make any difference? I understand if an IP building is demolished and replaced by a PPoR.

    What I find confusing is that I am building on vacant land. The value of the land can be apportioned as at the purchase date. At sale date is the capital gain based on the house and land as a single asset? Or is the capital gain for the land calculated then the capital gain for the building calculated?

    I am also wondering how the 50% share is treated. In my case 50% of the land will not have ever been used to produce assessable income.

    The most important thing is what records do I need to give my accountant so he can correctly calculate the capital gain?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    capital gain would be based on land and building

    50% share would be bought out so yo will have 2 separate interests in that property with different tax aspects.
     
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  5. Perthguy

    Perthguy Well-Known Member

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  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The costbase for the existing property would comprise two elements - 50% historical cost and 50% acquired from partner. Then you would have build costs etc.....These are all elements of the costbase.

    How can you say ÿour 50% did not produce income...You have three or more elements:
    50% that did produce income that is apportioned based on time etc (eg up to time it becomes PPOR)
    50% land that did not produce income that may well be 100% exempt
    Build costs etc

    Take care with selling too soon...It can affect all manner of issues. If your intention is to build a PPOR then questions about selling could be construed as a development masked as a home. That runs the risks of NO main residence exemption AND GST concerns also.

    These complex issues are all sound reasons to have a personal tax adviser. There is far more to this than you see in this thread.
     
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  7. Perthguy

    Perthguy Well-Known Member

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    Thanks @Paul@PFI. I won't be selling in a hurry. I want a long term home. I realise there are a lot of issues and I need a personal tax advisor. I was just trying to understand some of the concepts initially to see if it is perhaps pursuing further. For example, if I build a home to live in on IP land, live there for 15 years then sell and have to pay tax on 100% of the capital gain, I would find somewhere else to build my main residence!
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Technically when you punt the tenant it commences being land intended for your home. So its not IP land then. One benefit of this strategy is that during the build etc you get the main residence exemption as if you lived there - And that before a house is complete. Its an exception to the "you must live in it for it to be a residence" rule. The catch is after completion you must promptly move in and stay there at least 3 mths. Do that and you buy 1 year of exemption as an example.

    There will be some complexities around the CGT elements and some calcs but the key issue is good records of dates and costs etc. You wont have to pay tax on 100% of any element of the gain. Quite the opposite :

    - Land - Pro rata based on dates. The longer you live there the more that erodes (ie in 20 years time it would be 25% taxed as a rough guide)
    - New House exempt as it is a separate CGT asset to land as it was constructed afterwards (I know its not truly separate but tell the Govt)

    So lets look at that sell in 15 year idea. You may find 10% or less of the property profit is taxed....

    One question some ask - Can I get land valued to see if I can minimise the CGT attributable to the former IP? Sorry you cannot. Its a common and logical question BUT not what tax law allows.
     
    Last edited: 14th Feb, 2017
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  9. Perthguy

    Perthguy Well-Known Member

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    Thanks @Paul@PFI. One of the complexities in my example is that the tenant would stay in place during the build because I would be building an additional dwelling on the land. Until the new building gets its own title it would effectively be being built on IP land. This is the exact reason you and @Terry_w state that personal tax advice is needed. This is not a straightforward scenario and it would be very easy for someone like me to overlook a number of important issues.

    At this stage I am looking at selling a minimum of 15 years after initial purchase but more like closer to 20. If this goes ahead I would be occupying for around 3/4 of that time. If I can afford to hold then I won't have to sell and move, which would be preferable. I am just getting some idea of implications if I did have to sell.