Duplex build on PPOR help

Hi all

We purchased our PPOR which is an old 1970s home in NSW few years back. We have been living in this a few years and have encountered some issues with the home such as foundation issues, pool cracking, roof sagging etc. and it is starting to get to a point where we are considering a KDRB as opposed to trying to fix the existing home. We are on decent amount of land.

So my question is: what if we decide to knock down and build 2 stand alone homes and subdivide our PPOR, and sell one of the homes and live in the other, what would be our CGT or GST implications?

We hope to reduce our mortgage by selling one and living in the other.

If we had to pay CGT or GST, would any of it be discounted given we've lived in the original home as PPOR for almost 5 years now or does this reset if we subdivide?

What is our best move forward? We want to keep one as our main residence as this is our first home and are devastated we've encountered these issues, but unsure what will be best move for the second home. All I know if that we do not pay GST if we sell after 5 years but I am confused if this is considered GST or CGT and if there is any discount or way to keep this CGT free?

Any advice or feedback is appreciated.

 

Is it an option to live in one for a period (long enough to get all your bills and ID switched to that address, IE it becomes your PPOR. And then change your mind and sell that one and move into the other one, and get everything changed again to the new address?

We're in basically the same situation and are currently getting some estimates for dealing with the current place - might be less required than for you. We've had discussions with builders so have a fair idea where we stand in regards to KDR duplex.

 

Is that something we could do? Would we still need to pay CGT or GST if we do that?

 

I have written a tax tip on this. Will link it later if you can't find it

 

See what Terry and others add. Hopefully something more useful than "see an accountant" which is all I could add I'm afraid.

 

I can’t seem to find this can you please link it?

 

I hope it’s helpful. All my accountant did was send me a link to the ATO which said if you sell after 5 years you don’t pay GST. The rest of the information is very confusing!

 

Tax Tip 27: Borrowing to knock down PPOR and build duplex and Rent one Tax Tip 27: Borrowing to knock down PPOR and build duplex and Rent one

and


Tax Tip 566: CGT Demolish the Main Residence Build a Duplex and later sell without moving in Tax Tip 566: CGT Demolish the Main Residence Build a Duplex and later sell without moving in

 

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

 

Yes it's easy to find info on when you need to pay CGT. Not so easy to find info on not paying it

 

Thanks Terry. From what I read and understand if we subdivide and sell portion of our land that is subject to CGT and if we build on it and sell it’s subject to GST unless we hold it for 5 years?

Would we need to be registered for GST? And would margin scheme be applicable to us?

Also when does the 12 months 50% CGT discount start from? Is it when we started the plans to build and subdivide or when we demolish the house?

 

No that is not correct

 

Can you explain? From what I read it seems if you build, subdivide and sell that is considered as money profit scheme so GST applies even if I’m an individual and so I would need to register for GST?

 

That may or may not be the case

 

The costbase for HALF the land will pass to the new home. And its build costs.

The half being sold = No main residence exemption I am sorry to say. A main residence exemption is based on a sale of a dwelling that WAS your main residence. However, if you build a replacement dwelling on part of the land that included your former house its OK. Strange rule I know. It wont meet the test. And likely GST on sale and income tax (not CGT) for the sale. However if you subdivide the land and sell it as vacant its also arguable its a CGT sale and no GST applies on sale. This may be a "mere realisation" rather than isolated profit making.

Selling to reduce debt is a form of profit making so care must be taken to do just as little as possible to avoid the revenue tax issues with profit making. Or go hard and make it profitable and consider ways to limit tax like the GST margin scheme etc. Compare the two...although its impossible to predict with accuracy

The other option is sell the old house and its land (no GST and CGT exempt) then construct on the new subdivided land. The CGT 4 years construction rule can backdate to day aftre you moved out of the old one + use of the 6 month former home rule. And the new build then includes 50% x existing land as its costbase and the new build costs. You effectively own two CGT assets then. Old land and new house. SOME of the land (ie between its purchase and date you backdated) can be exposed to CGT based on some taxable days but if you never sell and die while residing it vanishes.

 

Hi Paul appreciate your thorough explanation. So if we keep one side as we want to stay and live there it is main exemption? In terms of the other side we want to sell do you mean there is GST to pay and other tax?? What do you mean and income tax? How can we use GST margin scheme - we are individuals do you need to be registered for GST there is not much info I can find on this and it’s very confusing. Ideally we want to try to find the best way if we sell one side. Is it better to try to keep the property to lease and sell later that way we pay CGT? And when does the 50% CGT start is it when we demolish the existing house we wait 12 months or is it from when we started doing the plans ?

 

I cant addresss your q's. I have insufficient information and its why personal tax advice is wise. Seeking advice and documenting intentions is very important. If a dispute with the ATO arises later its great to have these records of discussions and advice. Its then less likely penalties for recklessness or evasion will be considered.

There are ways to minimise GST. Most people I ask thing GST is 10%. It isnt. With the margin scheme it can be much lower - Often 5% approx. THEN the GST on the costs to build what is sold may offset that significantly rendering GST a trivial amount. Delaying sale wont often save GST and can increase the GST cost (and reduce profit). One catch to saving GST. Each $1 of GST saved adds $1 of taxable profit