Splitting block - tax considerations?

Hi,

Thanks in advance as I am sure this has been asked before.

We complete in a month's time on a house that sits across two lots. We are renting it back to the current owner for 6 months.

Our intention is to demolish the house, split the title and build our home on one side. The block that we wanted is actually going to be the most expensive to develop (non standard sewer connection required) so our intention is sell this block.

However, we are now in the territory of looking at a slight loss on that block (based on conservative development cost estimates) so are considering building a house on that block first (we can't afford to build on both blocks at the same time).

I've seen this done in the area a few times recently and people seem to have lived in the properties for 3 or 6 months. Is there a reason for this? We are considering living in the house (so we can sell our current property) and whilst our home is being built.

What are the capital gains considerations that I need to consider? How can I best use our position to offset potential exposure to CGT? Do we have to consider GST? Does living in a property for a small period of time help offset either of these taxes?

Thanks

 

See my tax tips, I have a few on this

 

Thanks - you have a lot of tips! I will see if I can find what you are referring to

 

I've read a few of them Terry - they are great thank you.

I have to admit I am even more confused. Have we scuppered ourselves by agreeing to rent the property back to the current owner for 6 months?

Our intention was never to use it as an investment property. We just wanted land to build our own home on.

Regardless, if we move into the newly built house for at least 3 months and change this to our principal point of residence, would we be exempt from CGT or GST if we sold (most likely sold at 6 months)? There will be no other rental to other parties, only the current owner which helped us secure the sale.

 

It potentially could be CGT or income tax or tax free. Depends

 

Are you able to help me out a bit further here with what I should be asking my accountant about?

I've worked through this in a bit more detail. The intention now is as follows:

1) Rent house back to current owners for 6 months then demolish the house.
2) Build on one of the lots underneath, retain the title over both blocks.
3) Move into this property when it is complete (my understanding is that if we live in it for more than 3 months, I should be able to reclaim part of the stamp duty as it is no longer an investment)
4). Sell our current house so we can release the equity.
5). Split the title so the lots are separate.
6). Begin build on the other lot.

7) Sell the house we are living in and rent back.
8). Move into other house when complete. Happily ever after ;-)


In this situation, my read is that we wouldn't be considered an Enterprise? That CGT would apply but if we owned the property for 12 months (which we would have) then we can apply for a discount.

Any thoughts?

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As an aside, from speaking to our accountant, she suggested the best option might be to set up a company and pay company tax on the first build. My concern is the implications of dissolving the company and how this would be taxed (presume that it would go straight to my income tax which isn't very inviting).

 

Ask how to keep this on capital account
How to maximise main residence CGT exemption and minimise CGT.
Also consider deductibility of interest and how to structure loans from a tax and lending aspect.

 

Thanks - so confused by the best way of approaching this :-/

 

Trick questions - Answer is "probably cannot" except for the interest matter which will need legal advice to have it established. The CGT one may be both assisted or harmed by a company.

A accountants reply like that may indicate someone unfamiliar with property / developer tax issues. Did they explore the issue of enterprise ? Thats a good start point.

Most of the issues can be pre-read in our developer toolkit.

 

Thanks - I will have a read over your toolkit. Thanks