Capital Gains Tax on a Subdivision

[skinner36]

I hope I this is in the right section

Would you mind answering some questions from a couple of property amatures?

We are a couple in our mif 50's living in Croydon, Victoria.
Our family home is on a 1280 square meter corner block with the house situated toward the rear. We are thinking about subdividing and selling the front part of the block, which will be between 480 and 500 square meters.

Part of the proceeds from the sale wil be used to finalise our existing mortgage, leaving the remainder to invest elswhere for our retirement.

We have just started to investigate the steps we need to take to put this plan into place.

There was a bit of a shock for us when we spoke to the realestate agents and they told us that we will have to pay about 40% in capital gains tax on the sale. This will give us enough to pay off the mortgage but not very much left to reinvest for our retirememnt.

My question is.

Is there anything we can do to minimise the amount of tax we will have to pay to give us a much as possible to invest for our retirement?

Thanking you in advance for your help.


John

 

[Rob G.]

Think you mean about 40% of land will be subject to CGT, less costs of acquisition and subdivision.

Even then it would probably get a 50% discount.

Might even be totally exempt if purchased before September 20 1985.

Not enough information given.

Cheers,

Rob

 

[skinner36]

Thanks for your prompt reply Rob.

The property was purchased in 1990

I have tried to give a fair bit of information but not knowing what is required I have obviously missed a lot out. What additional information would be required?

Please forgive my lack of knowledge here as I am very new to this.

Cheers,

John

 

[Kennyjaiz]

Thanks for your prompt reply Rob.

The property was purchased in 1990

I have tried to give a fair bit of information but not knowing what is required I have obviously missed a lot out. What additional information would be required?

Please forgive my lack of knowledge here as I am very new to this.

Cheers,

John

Hi John,

I assume when you say "family home", it means that you have used it as your main residence (aka Principal place of residence) for the whole time, and you have not produced income from this family home?

As Rob G. said, I think you have misinterpreted the Real Estate Agent. (However, I wouldn't accept tax advice from an REA at the best of times). Have a the CGT calculation here:
http://www.ato.gov.au/individuals/content.asp?doc=/content/36907.htm

and see if it clears anything up for you. (Note, Example 2 is the one that applies since you bought the property post 1985).

This will also give you a little bit more information:
http://www.ato.gov.au/individuals/content.asp?doc=/content/36542.htm

Lets us know if you have any more questions.

If you are concern with the tax implication, I would recommend that you seek independent professional advice before you begin. It may be a bit of a hassle, and it may cost a little, but it's better than realising you've made a mistake down the track. Being close to retirement age, tax professionals should be able to give you some recommendation on tax strategies as well.

Best of luck
Kenny

 

[skinner36]

Hi Kenny,

Yes, you are correct in your assumptions that this is our principal place of residence and that we have not received any income from it.

Thanks for the web sites, they were very informative and I will definately look towards professional help. I have two additional questions thought.

How do I determine what our house was worth (seperate from the land) when we ourchased it? I need this value so that I can calculate the % value of the subdived block as compared to the whole block.

Do you know of an good accountant in this field?

Regards,

John

 

[Kennyjaiz]

Hi Kenny,

Yes, you are correct in your assumptions that this is our principal place of residence and that we have not received any income from it.

Thanks for the web sites, they were very informative and I will definately look towards professional help. I have two additional questions thought.

How do I determine what our house was worth (seperate from the land) when we ourchased it? I need this value so that I can calculate the % value of the subdived block as compared to the whole block.

Do you know of an good accountant in this field?

Regards,

John

Hi John,
I am not entirely sure. But as the example suggested, the ATO is likely to accept several quotes from Real Estate Agents (possibly an average of the quotes) and professional valuers. However, this would require that you have already done this as you purchased the property in 1990. If you haven't done so, you may also consider using the local government estimates (on your rates). The rates statement (in VIC) should clearly indicate the estimate for land value and capital improved value (building + land). The downside is local government typically understates the value and hence potentially lower your cost base.

You can also contact the ATO for recommendations (and anonymously if you wish) and run pass anything you are unsure of. It's always a good place to start.

Sorry, I don't have any recommendations on good tax accountants. Maybe other members on this forum can help. But I am constantly impressed with Julia Hartman's knowledge on Tax Law (she's writes for the Australian Property Investor Magazine). http://www.bantacs.com.au/pr_jhartman.php

Best of luck
Kenny

 

[Mry]

You really are best off seeing an accountant on this matter. The problem with subdividing and selling off part of a PPOR is that your PPOR exemption does not apply to the split land, and your existing cost base is the price you paid in 1990, leaving you paying tax on a rather large gain.

I usually recommend a valuer for evaluating the split of the assets from purchase since they have to value the split off land, the land under the house and the house itself from the purchase price. Most real estate agents I deal with don't feel comfortable going to that extent. Hopefully the value of the split land is high in order to reduce the gain.

Since the sale price and cost base are known, the valuation is the last "piece of the puzzle" for you to work out what your gain is. Once you have worked that out with your accountant, its time to look at what you can do to minimize the effect of the sale on your taxable income.

 

[mezi]

Similar situation

Hi
I need some advice please

I have recently got a permit to build a unit on back of my house, a corner block. I will subdivide the land now. I had the property for 2.5years. From last year i have converted it into investment property.
My questions are
1. What will be the capital gain tax if i sell the subdivided land. Is it going to applicable of 50% of the capital gain because i had the house for 2.5years or will it be charged on full capital gain
2. If i build a unit on the block and sell it. Will the capital gain tax be charge on 50% of capital gain or on full capital gain considering i had the original house for 2.5 years
thanks for the advice
regards

 

[kum yin lau]

Hi, why sell? Why not subdivide, build, and after that pay off PPOR loan?

LOC on present PPOR equity & keep using LOC for whatever expenses.

Say total build cost = $250000 and rent @ $380 pw = $19500 p.a.

Interest = $17500 [7%]
Expenses = $5000 approx.
Shortfall = $3000 claim tax deduction
Depreciation = $5000 claim deduction
Total tax deduction = $8000 x 15% [assume low income] = $1200

After Year 1, loan = $253000 [actual out of pocket = 0]

$1200 tax savings pay down PPOR loan.

Year 2 interest = $17710 expenses $5000
shortfall = $3210
Depreciation = $4500
Total tax deduction = $7710 x 15% = $1156.5

Interest saved 1200 x 7% = $84 + $1200 + $1156.5 = $2440.5

See, you don't need to use your own money, you don't need to increase rent, your PPOR debt is paid down a lot faster.

It's the classic debt recycling technique. Slow at first but snowballs.

Will your 'other investment' do as well?

KY