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

Discussion in 'Accounting & Tax' started by Terry_w, 21st Jun, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    The main residence exemption only applies to land with a residence on it – a hint is in the phrase ‘main residence’!. If you were to demolish the house and sell the land you could be in for a nasty surprise as there would likely be CGT applicable. GST might be an issue also.


    Example

    Homer purchased a main residence in 2010 for $1mil. It was dilapidated when he bought it and it has only become more run down since. Luckily the land value alone is now worth $2mil and Homer is negotiating with a developer.

    They agree on $2mil on the condition that Homer remove the house.

    Homer knocks the house down and stays in a 5 star hotel with a butler service for the full 42 day settlement period. It will cost him about $40,000 but, heck, he has earned it and deserves it for making a $1mil tax free capital gain.

    Later Homer does his tax return and finds out that the main residence exemption cannot apply!



    No problem says Homer, the value didn’t increase much by him knocking the house down.

    However, Homer is shocked for a second time because the cost base of the property will be, basically, the purchase price plus costs such as stamp duty and a few other fees and charges and the demolition cost. Perhaps $1.1mil in this case. This could mean a capital gain of about $900,000.

    That would be about $450,000 additional income for Homer, how as head scientist at Lucas Heights is already on the top tax rate which means he has made a mistake of about $211,500 plus the $40,000 for the hotel!


    Had Homer sought advice there may have been a way to structure this so that the main residence exemption remained, and the demolition occurred.

    Strategies to keep the exemption may be to pay for the demolition after settlement, or to give the developer possession before settlement or just reduce the price by the cost of demolition.
     
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  2. propertyaulover

    propertyaulover Member

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    Interesting article. I not understand what is the problem. Do you mean homer sold his house to a developer for $2mil?
     
  3. croseks

    croseks Well-Known Member

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    Thank you Terry! I have a question though;

    What if homer subdivided his block, then demolished his house and rebuilt 2 x townhouses and used one half as PPOR and one half as IP.

    Would his new PPOR remain CGT free and the IP have a cost base of 0.5xcurrent value of land?

    I hope that makes sense o_O
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    One of the new houses could potentially remain CGT. Cost base would depend on the circumstances.
     
  5. datto

    datto Well-Known Member

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    Homer should have stayed in a trailer park.
     
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  6. shorty

    shorty Well-Known Member

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    Wouldn't GST apply though as new residential?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    If the owner is conducting and enterprise and is registered or required to be registered for GST.
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I have never considered this until now....

    Q : Should Homer apportion the stamp duty on the house / land if he demolishes the house ?
     
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