Selling sub-divided land tax free

If you recently sub-divided your principle place of residence, with the intention of building a new principle place of residence at the back, but could not longer build for whatever reason. Could you sell the back block tax free?

What tax implications generally apply to this situation?

 

If you sold the main residence with the subdivided lot together and it was under 2 hectares then it may be tax free.

If you sold the back block seperately then tax will apply. May be on cgt account. May be on revenue account.

Even if you built on the back block and moved into the second property later on partial cgt would still apply to that property even though it was your main residence once you had moved in.

 

Don't forget to consider gst too.

 

What are the conditions to be eligible for the first point? I.e. selling both together?

I was under the impression that if you built at the back and made this your principle place of residence it would be tax free. Why would partial cgt apply if neither of the properties are rental's / for investment purposes?

 

You can only have one main residence generally. So if the new lot is the old lot isn't and vice versa.

 

But what if you sold the front house which you were residing in, then after the sale started building at back to then reside in?

 

The main residence exemption above applies to a dwelling that you live in, as well as any adjacent land surrounding the property up to an area of 2 hectares.

However, section 118-165 of the ITAA 1997 states that if you sell the land separately from the dwelling, it is no longer covered by the main residence exemption.

Taxation Determination TD 97/3 provides that where a land parcel is subdivided into two or more blocks without any change in beneficial ownership, the Commissioner treats this as a division of the original land into separate assets, not simply as a different way of holding the original land. The subsequent sale of any of the blocks should not be treated as a disposal of the original asset. Rather, each block should be treated as a separate asset, with the acquisition of each of these blocks being the same as the original parcel of land.

As this second block of land is a seperate asset to the first asset (your original main residence) the seperate asset hasn't been your main residence for the entire ownership period. It will be subject to cgt from the date you purchased the land up until you moved into it.

This scenario is misunderstood by many to their detriment sometimes.

 

Thanks for the responses.

So what is my best option to maintain the residence exemption on both properties.

Sell the house with the newly subdivided land together?

Or sell the front residence, then build a new house with the proceeds at the back to live in (then sell)

 

Your last paragraph shows you didn't understand what was written above. It wouldn't be CGT free.

Also if selling you have to consider that this could be on revenue account and if this is the case the main residence exemption may not apply at or, or only in part.

Get specific tax advice

 

Anecdotally it's pretty much not going to happen.

If you have a PPOR that is developable it's generally best to sell it as a potential development site so that it's all CGT free.

If you want to sell off one half of it to reduce debt etc then you will just have to accept that it all can't be CGT (or income tax) free.

It almost killed me to sell my PPOR last year that was a R30 triplex block with our PPOR on it and not develop it (even partially). The "profit" from selling it as a whole without tax was more than dividing it up, subdivision costs, GST, CGT, selling costs etc

 

One strategy is to sell to a related entity which doesn't the development.

 

Stamp duty kills that option sometimes but depends on the gain.

 

The issue that land may comprise more than one title (ie a subdivided lot into two) does not necessarily mean CGT applies to one of them. If the two lots are adjoining and used as adjoining lots as the main residence they are BOTH exempt provided the total area doesnt exceed 2HA.

Example : House on one lot + pool or tennis court on another.

However if the land is fenced and/or used for different purposes then the main residence exemption ONLY applies to the portion used for the main residence and that may be less than all of the lot. So lets assume Fred owns a duplex on a single title. Fred lives in half and rents to Mary in the other. Only 50% is eligible for the main residence exemption. If Freds parents move into the other lot its also taxable as the owner (Fred) does not occupy the property as their main residence. At best it may be an alternate residence for Fred. He cant even argue he was absent from his lot as the duration test is not met for the property being his MAIN residence.

Subdivision relates to land title. Land title itself doesnt relate to a CGT issues unless there is a taxable purpose. Tax advice will consider the title, land use and its characteristics and the historical issues as this could also impact apportionment.

 

My accountant told me if you sell the front PPOR and then build/move into the back block within 12 months, it also becomes tax exempt.

So I am confused with the different responses I am receiving..
Again appreciate the responses

 

Your account is incorrect. Ask him to put it in writing with the legislative basis for his views.

 

I've had the same response from two different chartered accountants..

Mind you, during the scenario you would only have one PPOR at a time. So PPOR at the front, then once that is sold, the new PPOR will be built at the back. Neither at any point will be rented.

 

but the land under the 2nd main residence will not qualify.

 

Here is an old tax tip that I wrote
Tax Tip 43: Demolishing PPOR and Subdividing land and building 2 houses

 

Shouldnt be practicing if thats the advice.

 

Our developer toolkit explains many of the key tax issues. The final issues depend on many factors eg build to keep v selling and whether there is an enterprise etc.