Subdividing a PPOR. Please help with financial strategy

I've owned my PPOR for about 10 years and it's got a great back yard for sub division.

I understand you don't pay any CGT for capital gains on a PPOR.

How can I best achieve maximum profits? If I sell as is, I'll get about double what I paid. If I construct an IP, I'll get hit with CGT if/when I sell it.

Would a better strategy be to build the house at the back, sell the one at the front and move into the new house for a year or two, then sell that within a 6 year period, or until I find a new PPOR to buy?

I've asked about financing IP sub division from offset funds before and received a very solid "no", but would this situation be suitable to fund from IP offset funds, because the new house will be my PPOR and if my theory is right, I won't get hit with CGT for either property, as well as claiming more tax deductions by paying a higher interest rate until I sell the houses?

Your thoughts appreciated.

 

See my tax tips

 

Hi Terry,

Firstly, thanks for writing all of the tips, they're much appreciated.

I read through them and other than #60 never use cash to invest (i may be wrong but I don't think this applies to my situation?), the best I could find was #43 about demolishing
PPOR and sub dividing to build an IP.

As I won't be demolishing the existing house, only building a new one at the back that I intend on moving into after selling the original house. Does this count as two separate PPORs or are there laws preventing claiming a second PPOR after the first one has been split in half?

 

When you subdivide your ppor you cant claim both as CGT exempt, you will end up paying it on one or the other

 

Is that the same if you buy a parcel of land and build a new house to live in? Aren't you always allowed one PPOR to be CGT exempt?

I'm not trying to be obtuse, I don't understand how (or if) it's different when you split up a piece of land that's already your PPOR.

 

To elaborate further

1. Split current PPOR backyard into new title.
2. Construct new house.
3. Sell current PPOR.
4. Move into new house as the new PPOR.

Does this new house become CGT exempt if the first house is sold before I move into the new one? I've got enough funds to build it without taking a loan.

 

nope, as I said CGT exempt can not be claimed on both. ATO website has a big write up on it if you want to search it. If you choose to sell the original house and make the new house your ppor hence CGT free the sale of the existing house will be worked like so if land is split 50:50 old and new block: sale price - original house value at time of purchase - 50% of land value at time of purchase = amount CGT has to be paid on.

This is similar to how my accountant dumbed it down for me, I'm currently living in a house in what used to be my backyard

 

That's makes sense, many thanks. I don't know how to begin modeling it.

If the land is split, the combined land value is suddenly more than double the value of the individual block but the existing CGT exempt house and land will go down in value 20% or so.

I'll have a play with numbers later tonight and search the ATO for articles too.

 

Tax Tip 43: Demolishing PPOR and Subdividing land and building 2 houses

Tax Tip 27: Borrowing to knock down PPOR and build duplex and Rent one

Tax Tip 76: Calculating the Cost Base for CGT purposes.

 

A follow up, I've been given different answers.

I spoke to the ATO and my accountant about this. Both said as long as I
- Do not demolish the existing house (current PPOR),
- Move into the new house shortly after construction is complete,
- Sell the original PPOR within 6 months,

That I'll be CGT exempt. If I take longer to sell the original PPOR, I'll have to pay CGT on the increased value between the month 6 and when I sell it, which would be minimal.

Terry, the links you provided have the same advice as the ATO, that if I demolish my current house that I'll be hit with CGT for the new ones.

I'm consciously trying to get to the bottom of this before proceeding but don't want to cause any offence if I'm misunderstanding anything.

 

Yes the original main residence could be exempt. But if you move into the new one you build it wouldn't be exempt because that is a new dwelling, but the land part of it was owned for a while and the main residence exemption would not apply to this as you would have already claimed it for the other plus that part of the land never had a dwelling on it.

 

And, keep in mind that even though it may be subject to CGT any tax payable may be minimal, or nil even.

 

When land is subdivided a separate asset may be created that may or may not be a CGT asset at that time. While a CGT event doesn't occur there may be an apportioning issue for the former exempt asset. This is what happens with a PPOR subdivision....where the new build is then occupied as the new home.

So there must be a reasonable apportionment of the original property costbase between :
1. The old land with house; and
2. New land (prior to build) with new build.
The date when the land ceased to be part of the main residence will be important too.
Generally this would require a valuer to apportion as taxpayers will lack the necessary skills. A REA cannot apportion original cost either.

During the subdiv project some of the costs will be direct to item 2 (ie direct build costs) and others will be apportioned across both in the same % or some other reasonable basis eg driveway, fence etc. Each cost requires review for the basis.

The CGT on the former home will be based on this final cost base (ie Item 1) and likely be 100% exempt if its as described and sold within 6 months of moving from old to new. However the cost base of the new home will carry a certain element of deferred CGT as the difference between the portion of land will be based on cost (rather than market value) and for the period between acquisition and occupancy there is no exemption.

So the new home isn't 100% exempt and should not be thought of that way. It is partially exempt up to occupancy and then exempt thereafter.

Demo should be avoided as it is a defining CGT event that may not adjust the cost base either !! It may also result in a issue that suggests that the project is ordinary income if the land (or some of it) becomes trading stock.

PS my comments are very over simplified here to address the specific issues.

 

Was going to start a new thread but found this in the search.

I've purchase a PPOR in the last 2 years, large block ~3000sqm.
There is ~1300sqm that could be split off/
Wife's not really keen as that's where the tennis court is, we have kids, friends come over etc.
But truth our family only uses it maybe 5 times a year and it's a lot to maintain.
It gets used by others weekly (old group of 70-85 year olds come and play on it every Friday, also few of the neighbours use it probably 2-3 times a month)

We're spending 3-4 times the about of time maintaining the court and surrounds compared to actually using the court.

I recall reading somewhere that when splitting off land like this it can be CGT free.

It's not something going to rush into, but it's honestly costing more time and money then I think it worth.

Often consider the time saved and funds from sale used to payoff PPOR debt

 

main residence exemption can't be used on vacant land - with some limited exceptions.
Cost base would go back to purchase price apportione.d

 

Appreciate the response @Terry_w

Do you have any examples of the exceptions that might apply, thought this might have fallen into that category.
Large block, not maintainable - downsizing size

If that's not the case - regarding the costs base, assume it wouldn't just go on land size
Say 1300 land sold from original 2800 block being 46% being sold.
As the house wouldn't be sold, which holds majority of the original value.

Would it be reasonable to say look at the valuation when property was purchased.
Which splits the house/land value then work off say 46% of the land value from that valuation as the cost base?

 

I would be recommending personal tax advice. This may involve other factors

 

You might be best off ordering a new valuation, but you are right that the house has to be taken into account and it won't be a percentage oft the whole value, it would be a percentage of a percentage.

Slightly related
Tax Tip 216: Tax Trap Demolishing the Main Residence and Selling Land Tax Tip 216: Tax Trap Demolishing the Main Residence and Selling Land

 

Thanks Paul - I've sent something off to my accountant not long after original post.
Thought if I'm writing it here, it's probably best to ask them.
My thought was there might be something that allow it or might work through private ruling.

 

@Terry_w ahh yes new valuation makes sense.