There are many different strategies with different outcomes, depending on whether you’re planning to sell the part with the house, or the vacant land, or build and move in, build and rent out or build and sell straight away. All these are options to consider and each has its own tax issues!
An example of the most common subdivision situation and the capital gains tax and tax deductions is set out below:
SUBDIVIDE AND SELL VACANT LAND
Aiden purchased a suburban half-acre block with a house in 2014 for $600,000. At that time the house was valued at $180,000 and the land at $420,000. Aiden incurred stamp duty and conveyancing fees of $32,000. He moved in as soon as the property settled.
In 2017 Aiden subdivided the land into two equal blocks. The costs associated with subdivision totalled $16,000 and included application fees, survey and legal fees. He also paid $2,000 to have water and drainage connected to the newly created block.
In October 2017 Aiden sold the vacant block for $497,000. The main residence exemption can’t apply to vacant land so Aiden will have a CGT liability. He contacted a couple of real estate agents and was advised that the two blocks are equal in value so the original cost of the land can be split equally.
There were real estate agents fees of $13,000 and legal fees of $1000 associated with the sale.
The cost base of the rear block is calculated as follows:
|
Cost of the land (50% of land value at purchase of $420,000) |
$210,000 |
|
50% of the stamp duty & legal fees on purchase |
$16,000 |
|
50% of the subdivision costs |
$8,000 |
|
Cost of connecting water and drainage |
$2,000 |
|
Agents fees and legal fees on sale |
$14,000 |
|
TOTAL COST BASE |
$250,000 |
|
Sale price |
$497,000 |
|
Less: cost base |
$250,000 |
|
GROSS CAPITAL GAIN |
$247,000 |
Capital Gains Tax
Aiden will be entitled to the 50% capital gains tax discount, as he has owned the above land for more than 12 months. The remaining capital gain of $123,500 will be added to his taxable income and taxed at his marginal rate. When we’re talking about dates for this CGT discount, we’re referring to the contract dates, not settlement dates.
It’s important to note that the subdivision itself does not trigger any CGT liability; it’s only the actual sale (and change of ownership) that results in a CGT event.
Should Aiden decide to sell his home in the future, he will still be entitled to the full main residence exemption, assuming he hasn’t used the property to produce assessable income.
Other tax considerations
If Aiden had built on the back block and sold that new property he may have found he had a GST liability to consider as well as tax, which can make a huge difference to the profits. However, if he built on the back and moved in, or rented it out for a few years, then when he sells he shouldn’t have any GST liability.
As always, everyone’s situation is different and you should discuss your specifics with us, crunch some numbers and check out different scenarios before making any decisions. Contact Paris Financial on 03 8393 1000.
Rebecca Mackie, Partner, Paris Financial
