Subdivision, PPOR and CGT

I purchased a vacant block of land in Riverstone in late 2015, and my friend purchased the two lots next to it (total 3 lots). We currently have an integrated DA (land and house) in with council pending approval. The plan is to combine the three lots and subdivide to 8 lots and build 8 detached dwellings (4 bedroom double storey). I will have 100% ownership over 3 lots at the end. There are two stages to the development, with stage 1 being 4 lots facing east, and then later on down the track we will do stage 2 which will be the four lots facing west. In stage one I will own 2 lots, and stage 2 I will only own one.

At the moment I am living with my parents, and want to move into one, or all of my lots, and claim each as my PPOR then sell them off with the full CGT exemption, one by one of course I know you can’t do them all at the same time. I know that is a wishful scenario that probably wouldn’t work, but given my situation what would be the best course to take to avoid or minimise CGT?

 

If it makes you feel better, you probably wont pay CGT at all.

 

Why is that?

 

Sounds like a scheme.

Seek personalised tax advice.

 

Good contribution

 

You can only claim the main residence exemption once. Consider a deed of partitioning for the development so you acquire a home in full.

You have a lot of stuff to go through and the construction of 8 houses is a big business development.

Consider disputes, insolvency, gst, asset protection, death, finance shortfall, salaries for oversight and delays in settlement.

You will need a good holistic advisor who will organise everybody - tax, doc prep, strucuring, reporting, finance, mediation and so forth.

Sounds exciting and this stuff can be done with a bit of thought.

 

Thanks Ross. To clarify once the DA is approved I won’t have any involvement in the other 5 lots as I will have no ownership over any of them. In a scenario where you have an existing dwelling which is your PPOR, and you subdivide the land, build a new house on the new lot, sell your old house with the CGT exemption, move into the new house and claim that as your PPOR, I have read that could work in getting another exemption if you sell the new house further down the track. Is that accurate and can the same be applied in my case?

 

For the new build you will calculate a notional gain when you sell it and then pro rata the notional gain for the period of time it was not your main residence.

You can only claim the main residence once. So if you claim the old home is you main residence then the block your new residence sits on cannot enjoy the main residence exemption for that same time period.

So you will pay tax if the project makes a profit. You cannot move from property to property claiming that the sale of each one is a main residence.

And gst will be payable on the new build if you sell it within 5 years of construction.

And the project might be considered a profit making scheme and tax law will apply differently to what you think as well.

 

Not accurate as the property will only become a main residence after living in it. Land can be back dated 4 years as the main residence if you build on it and live in it three months. But you cannot overlap so the second block could only be the main residence going forward.

 

How will you get a CGT exemption on each property ?

From when the development starts the land is going to be trading stock. Lets assume you use cost base. Assume land was purchased for 1m. 250k per block of 4.

Then you will have some development costs. Lets assume for the 4 it came to 1m aud. So about 250k per house. Assume each property now worth 800k each. So a 300k profit on each house.

You then move into one and sell it 3 years later. No prob cgt event exempt.

For the 'home first used to produce income' rule to apply to a particular case, the following conditions must be met

• you must first start using the home to produce income after 7.30 pm (by legal time in the ACT) on 20 August 1996,

• you must only be eligible for a partial main residence exemption because the dwelling was used to produce assessable income during your period of ownership of the dwelling, and

• a full main residence exemption would have been available if you disposed of the dwelling immediately before it was first used it to produce income.

If all of the above apply, you have no choice but to use the market value of the dwelling at the time you first used it to produce income as the first element of the cost base/reduced cost base of the dwelling.

but all dont apply as the full main residence exemption would not be available for the other two only a partial exemption.

will also need to factor GST into your calcs as new residential property.

Might also need to consider that if the fourth house is built on your land and transferred to your friend then you may well be up for tax on that transfer.

Ross is right in saying a deed of partition will be extremely important but that will depend on how many houses will be built on the land you own.

 

Land cannot be a PPOR. It must have an actual residence on it. Not sure if a tent qualifies...

 

The second house would be built after a certain time of me living in the first, and then I would move into the new house once construction was completed, so overlap would be minimal. If GST is applicable if I sell the second house within five years then that could be a problem!

 

Thanks Terry that is handy to know. I would live in the first property for at least 3 months, and then once the second property is ready I would move into that. There wouldn't be much time from when the second house is complete to when I move in.

 

I would only be claiming PPOR once I have constructed the house and moved in.

 

Thanks Mike. I wouldn't use any of the properties to produce rental income, or are you referring to income from the profits on the sale? A deed of partition definitely needs to be done but my share of land on a m2 basis would remain the same as the original lot size, so there wouldn't be any value transfer between me and my partner.

 

Doesnt matter whether you used the properties to produce income as those other two properties will be subject to tax.

In my opinion it sounds like on revenue account and not capital account. Interaction of section 6 with the cgt provisions if any.

 

Tom buys a home in 2007.

He demolishes the house in 2016 and builds a duplex in 2016.

The first duplex is lived in as a comfy home but sold in 2017. Tom always thought the first duplex would have been his lifelong home but he loses his job and he is forced to sell it.

The second duplex was a rental property straight after the build was finished.

Tom moves into the second home in 2017 and sells it in 2027.

Their is a capital gain on the sale of the second house. Half of the gain is tax free as it was a home from 2017 to 2027.

This is the same even if the second home was not rented. Tom might have had his Mum live there for example or he could have used the second home as a man cave - tax is same

 

Assume the first duplex was CGT exempt when he sold it? When he sold the second duplex was the cgt calculated pro rata on the time it wasn’t his PPOR? Or is it straight 50/50?

 

The first home was always a home so it is tax free. Assuming the demoltion was to build a home for living and not turn a profit with resale (big assumption there mind you).

The second home enjoys a pro rata for the main residence exemption for the time the second was lived in as a home.

So if sold in 2023 then 6 years as a home. 16 year ownership so 6/16 of the gain is exempt through the main residence exemption.

 

The second and 3rd cost base will be the original land price, proportioned plus construction costs etc