subdividing land for a PPOR and an IP

Hi all, next year we settle on a vacant block of land that we will subdivide and build 2 free standing torrens title homes on. One will be our PPOR and the other an IP. We intend to hold the IP and the PPOR will probably be sold at a later stage as we look to upgrade for a growing family.

I am trying to better understand tax implications under various scenarios. I understand the specifics can vary greatly for any situation and I will speak with our accountant at a later stage but I would like to get my head around it a bit first.

Would really appreciate if anyone can clarify and/or expand on the following scenarios:

A) any sale of the PPOR would be exempt from CGT. 6yr rule would apply if it became an IP provided no other residence was claimed during that time. I understand that generally 3 months seems a satisfactory minimum time to live in the property before it is deemed a PPOR. Is there any minimum time that the PPOR needs to be held before SALE of the property occurs, for the CGT exemption to apply?

B) immediate sale of the IP would incur GST etc

C) if the IP is held and tenanted/available for rent for a minimum of 5 years, any sale would be subject to CGT but not GST

D) if the IP is rented out and sold at some time before 5 years??

Thanks guys,

 

A. Could be cgt free
B. Yes
C. Yes.
D. Gst and cgt

See my tax tips for some tips. I suggest borrow 105% for the lot. Then apportion the loans once finished and then pay down the ppor portion.

 

Thanks @Terry_w

Are you able to elaborate a little further on A) and D)? I have had a look through your tax tips and can't find something that covers these situations specifically (please direct me if I've missed it)

For D), is the GST and CGT tax apportioned?

Thanks

 

There are various other factors that you need to claim a place as a PPOR when building. Must live in the property for 3 months and must be within 4 years of buying the land etc.

D - only on the investment portion of the property.

 

@sandyfeet If it was me, build 2 after u get subdivision plans and upon completion moved into 1 and rent out the other then 6-8 months or 1 year later sell the ppor u moved in and move into the other one u had rented previously which then becomes ur ppor Then u reduce the cgt u have to pay. U could possibly keep both same designs in term of space and hence no mods in furniture required.

 

@melbournian that was an option I wanted to look into as well. Both layouts will be identical and we intend to do the subdivision first and then apply for seperate construction loans - this should help us preserve our own cash to offset PPOR. Are there any pitfalls with this idea? Feels like the ATO would somehow get their 'piece' of the pie!

The other thing we want to achieve is to borrow against the PPOR for investment purposes moving forward so we would have to plan correctly and look into it a lot more in order to transfer any security for the investment own so as not to lose deductibility.

 

The 2nd one wouldn't be totally exempt from CGT, but it would be worked out on a % basis and the % subject to CGT would diminish over time. In addition you could claim all interest and other expenses off the CG while it was the main residence, so the CGT may be nil.

Just make sure you borrow in full and keep spare cash in the offset until you sell one.

 

Thanks @Terry_w - I appreciate the feedback

Is it possible to borrow against the first PPR for investment purposes and at sale transfer security to the second PPR?

 

Yes. security for the loan doesn't affect deductibility of the interest. Tax Tip 22: Security for a loan does not determine Deductibility of Interest

 

@sandyfeet is it empty land? from what you are saying - you want to build one and then build the other. normally if that is the case- it is cheaper to do both builds at the same time (plumbing etc, filling in the slab, groundworks) otherwise you're likely to cost you at least 15-30% (rough guide) more and the builder would normally accommodate both with a discount.

if from funds and servicing construction cost and loans perspective the better option would be if it was pre-exitsing house already there and doing one in the rear or back. then yes, tidy up the first one move in get the subdivisional permits, sell the front then use the proceeds to do the back.

if from pure developer perspective, try to put 3 houses on the lot and sell if with the plans if you can't finance total build.

 

@melbournian yes it is vacant land. Both will be built at the same time so long as servicing is ok at time of application. The idea of subdividing and applying for separate construction loans is so they are not valued in one line. This should allow a lower cash injection and more cash in the offset against the PPR.

 

@sandyfeet yeah just do what terry said in one of his tax tips. loan for PPOR and depending how much you have split it into 1.homeloan(against offset) and 2. homeloan (withdraw) then use the funds you have in home loan 2 to fund the construction sub div etc.