Tax Tip 296: Selling Vacant Land and the Main Residence CGT Exemption

The main residence exemption only applies to land with a ‘residence’ on it (or ‘dwelling’ actually). Note the word ‘residence’ in the phrase ‘main residence exemption’!

Vacant land will not be the main residence and not qualify for the main residence CGT exemption (with an exemption for construction)


Example 1
Lisa buys some land and holds it for a few years and sells it for 50% more than she purchased it. She intended to build her main residence on it but received a good offer from a developer.

Lisa cannot use the main residence exemption to avoid CGT as the land did not have a residence on it at any point.



But there is a limited exemption where it is possible to claim the main residence CGT exemption on vacant land. S118-160 ITAA97 allows for the exemption to apply where a dwelling has been accidentally destroyed. If this were to happen the exemption could extend to cover the vacant land as if there was a dwelling.


Example 2
Nelson had a house in a bushy area and had lived in it since settlement. All the requirements for the main residence CGT exemption were met.

Unexpectedly there was a bush fire in the area and the house burnt down. Nelson said ‘ bugger this, I am going to sell the land and move’. The land sold and Nelson claimed the main residence exemption to avoid CGT, which is good as his house cost him $400,000 but the land alone now is worth $600,000.


The legislation limits this to ‘accidental’ destruction of the main residence. It won’t apply to intentional destructions.


Example 3
Bart lives next door to Nelson, but his house was missed by the fires. He has been approached by the new owner of Nelson’s property who wants to buy Bart’s land but wants the house demolished first. Bart demolishes his house and sells the land to the neighbour. Because it was not accidently demolished s118-160 can’t apply so Bart has a capital gain which is not exempt from CGT.


Bart saved money by not getting tax advice but in the end it could have cost him tens of thousands in extra tax.

 

And here is a twist. A main residence doesnt need land.

A main residence can include a caravan, houseboat, mobile home, RV. s118-115(b)

The main residence exemption is formed around the basic case rule. s118-110 which considers a dwelling, not land to be exempt. But if it is on land s118-120 includes the area of land immediately under it and up to 2Ha of any adjacent land as the taxpayer may choose. If there are other adjacent structures these can also be individually or collectively included in the exempt portion. The exemption broadens the dwelling exemption to further include adjacent land and structures. BUT...

If the dwelling is not sold with the land – for example, because the dwelling is a caravan and has been removed or sold separately – the sale of the land is subject to CGT. If a kit home, cabin or structure that could be relocated was on the land if it is sold seperately to the land this can lead to loss of the main residence exemption on that land.

Land which is used to produce income CANNOT be exempt. eg a small 2Ha farm and 1Ha is used to grow crops for sale. Only 50% would be exempt, not the 2Ha.

 

Under the 6 year rule it could be

 

And not all CGT aspects of a home are tax free.

Fred & Wilma own a family home. Their rear neighbour seek a easement (for sewer etc) to assist their proposed villa develepment and offers $30,000. This is fully taxable and not exempt. The costbase may be $0 but if they incurred indpendent legal advice this may be a costbase elemennt to reduce the taxable gain. the costbase of their home is not impacted and none of the historical costbase can be allocated. Ironically if they later rent their home s118-192 may impose a costbase reset at a LESSER market value due to the easemnet presence which could add to CGT at a later time. If the land was pre-CGT the easemnet is still taxable as the easement right is a new CGT asset.

No CGT discount applies as the CGT asset disposed is a right that was created hence the 12mth rule cant exist until the easement is given. You cant plan it fora year then transfer. The easemnet occurs ON transfer. In any event the CGT event doesnt permit a discount to avoid all dispute.

TD 2018/15 - the CGT consequences of granting an easement, profit à prendre or licence over an asset - CGT event D1 (not A1) - limited cost base, no 50% discount, no main residence exemption, no pre-CGT exemption - Tax Technical

 

Yes - Good point. The absence rule or other CGT elections and choices could also impact. eg Just as the land is potentially exempt if the owners had two eligible lots they may elect the gain on the property which produces the most favouable tax outcome. eg the spouse and family rules eg Tim and Michael are a same sex couple who each own a home.

I guess when discussing exemmptions we should realise that exempt gains are still then subject to choices eg a CGT loss may be best NOT treated under the main resdience exemption rules. But this can affect how the loss is determined

 

i don't believe you can apply a capital loss to the main residence by "not treating it as your main residence"

Section 118-110 says " (1) A * capital gain or * capital loss you make from a * CGT event that happens in relation to a * CGT asset that is a * dwelling or your * ownership interest in it is disregarded if:

(a) you are an individual; and

(b) the dwelling was your main residence throughout your * ownership period; and

(c) the interest did not * pass to you as a beneficiary in, and you did not * acquire it as a trustee of, the estate of a deceased person.

it says "is disregarded". it doesn't say "may" or "you can choose to disregard it". it is disregarded.

 

I meant in the context of a choice where one is available. eg two eligible properties. two properties for spouses etc. A taxpayer cant elect to take a loss where it would otherwise be exempt as such. eg Fred is single owns a home. Sells after 15 months and there is a CGT loss. He cant claim that loss as it is exempt.