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

Discussion in 'Accounting & Tax' started by Terry_w, 1st Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The Main Residence is generally exempt from CGT. Land cannot be a main residence unless there is a dwelling on that land, there is an exemption for demolishing the main residence and building a new property with a few conditions

    • It must have been your main residence before the demolition and

    • It must be complete within 4 years and

    • You must live in, as your main residence, the completed property for at least 3 months, and

    • claim no other property during this time

    If all these conditions are met the main residence exemption can continue to apply even though you will be living elsewhere during construction.


    But where you split the land and end up with 2 houses the main residence exemption can only apply to one of those houses. The portion of the land and construction cost for the new house cannot be eligible for the main residence exemption as you would have already claimed this on the other property. section 118-110 of the ITAA 1997.


    All this assumes you are not a ‘developer’.
     
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  2. GreatPig

    GreatPig Well-Known Member

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    Would CGT on the second dwelling start from a cost base of the value of that dwelling (including the land) on completion of construction?

    Or would it be based on the value before construction plus the cost of construction?

    So if the value went up by more than the cost of construction (due to the subdivision), would there already be some gain subject to CGT (though presumably not payable until the property was sold)? And would one therefore need to get the property valued before the development rather than after for determining the cost base?

    GP
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Cost base would be the land component (% of original amount) plus other costs not otherwise claimed.
     
  4. GreatPig

    GreatPig Well-Known Member

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    Thanks, Terry.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    And don't forget that a portion of the interest, rates, etc from the original main residence period can be used to increase the cost base on the investment properties to reduce CGT on the eventual sale. Section 110-25(4) ITAA97
     
    Last edited: 17th Nov, 2015
  6. mcarthur

    mcarthur Well-Known Member

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    OMG - my head is spinning! :confused:
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sorry = increase the cost base
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Tip - DA costs may apply to the new block rather than be split.
     
  9. mcarthur

    mcarthur Well-Known Member

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    Phew :cool:.
    Thanks again Terry for the great tax tip series!
     
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