Transfer title to wife to reduce CGT

Hello esteemed tax buffs.

I have a scenario to run past you if I may.

My wife and I bought a property in Brisbane in 2014 for $450,000 that we initially lived in for two years. We then bought another place around the corner and rented the original property out.

We’re now wanting to subdivide that property (remove house and turn one into two).

We’re using the original property as our PPOR for tax purposes but this will come to an end next year.

It’s my understanding that because we are removing the house to split the land into two, we will have to pay CGT on the difference between the value of the property before the subdivision, and the amount we sell the subdivided plots for.

For this example we’ll say the property is valued at $800,000 in it’s current state and the subdivided blocks would sell for 1.2m. So that would be 400k up for tax minus the costs of subdividing.

I would plan to sell both plots of land in different financial years.

At the current 50-50 ownership arrangement with myself on approx $150k and my wife not working, or earning limited income I estimated roughly $135k in CGT to be payable.

If everything (or 99%) of the property was in my wife’s name, this could be reduced to about $60k.
This is all assuming my limited knowledge on the subject and back of the napkin math are correct.

So finally to my question. Is there any reason I shouldn’t, or couldn’t transfer my half of the property to my wife prior to subdividing to reduce our CGT? I say half, but another option might be 99/1% if it made life with the existing mortgage on the property simpler ie. avoiding refinancing.

I’m aware that I would have to pay CGT on this ‘sale’ but due to it being my PPOR for tax purposes this would be zero.

I’m also aware that my wife would have to pay transfer duty on the half of the property I gift her. But would she only have to pay transfer duty on the half she’s getting from me ($400,000 worth) or would she pay duty on the whole property value?

Thanks for reading if you made it this far.

 

CGT will be payable on the % you transfer to your partner at market value. Where is your saving?

 

Won’t I be exempt from paying CGT from my sale as it’s my PPOR for tax purposes?

 

This is not correct.

The cost base wouldn't be $800k. It would be much lower.

You should get some tax advice as it may be possible to reset the cost base and save thousands in tax.

 

Selling existing residential premises is a CGT issue. However a profit making intention to develop and sell land is different. There is a enterprise. GST is involved. The main residence exemption doesnt apply as its a different asset. Its now vacant land. There are numerous tax issues needing advice.

 

No. You arent selling the residence. Its now vacant land.
And I suspect some of the profit will be a isolated profit making intention and that is NOT a CGT event and is subject to full income tax. Many opf the concepts are explained in the developer toolkit

 

I plan to. I was just wanting to make sure that what I wanted to do was within the realms of possibility before paying for such advice.

Are you able to elaborate at all? Are you saying our cost base would be the original purchase price even though it’s our PPOR?

 

Sorry I may not have been clear enough. I would transfer the title to my wife BEFORE subdividing the property. Ie there’s still a house on it.

 

Vacant land doesn't qualify for the main residence exemption so the cost base would go back to the purchase price and associated costs.

 

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

 

You could transfer before knocking down the house though..

 

Yeah right, that blows my mind to think that you can live on a parcel of land for 30 years and then just because you knock the house down before selling you’re up for 30 years of tax.

Thanks for the reply.

 

they don't call it the main residence exemption for nothing!

 

Yeah it just seems weird that you can live in a house on your land for 30 years and the base rate doesn’t start from when you stop living in that house, ie when it gets knocked down.

Essentially you’ve paid tax for a thirty year IP and it being your PPOR counts for nothing.

Anyhoo, regardless of CGT owed, I was mainly wanting to know if there was any obvious issue with transferring the property into my wife’s name before demolishing the house.

 

There are a lot of other legal issues to consider plus lending too.

 

agree but you would be surprised how many people have done exactly that.

i had a consultation with someone who had purchased a post CGT property for 40k and was worth 2m before demolition. they had lived in it for 20 years. they consulted me 4 weeks after it had been demolished.

i didnt have much good news.

 

Wow, how terrible for them. Can’t imagine they were very happy.

I often see people demolish, split and rebuild on one of the blocks to maintain as a PPOR while selling the vacant block.

Would this house count for a CGT exemption? Ie 50% of the initial property purchase price would be the base rate for the vacant land for calculating CGT, and the land with the new build would be exempt?

 

If building then the rules are different but if selling vacant land then no mre

 

I see a number of people who inherits mum's old house or IP and they think its all CGT free. They demo and then the issues become apparent. You cant reconstruct the former residence to fix it

ALWAYS get tax advice while thinking about choices. It may be far more practical and assume profit that is even tax free to plan and obtain developmnet approvala nd sell the house and land as is to soemone else to have the problems. Taking 80% of profit tax free is better than 100% of profit less GST and income tax.

Ironically I would recommend only three property tax advisers I know - Mike is one of them. Property tax advisers arent that common strangely. I also include Terry. Terry is a very competent tax / legal adviser and knows grass roots property tax issues very well . Some will say they are OK but arent. I hear and see some terrible property tax advice.

 

likewise. i refer to yourself and nick moustacas (although nick has more of a focus on reasonable size businesses now) and thats been about it. hwl ebsworth for most legal stuff. i agree many claim to know about property taxes but ive found the knowledge to be quite lacking.

terry isnt doing as much but if its a loan issue i send it his way. id have no issues with his tax advice at all but know its not something he does much of these days.