CGT when building a duplex

[Television]

G'day All,

Asking on behalf of a friend:

Bought a property in Sydney, has lived in it for a few years, now has moved out, demo'd property and is building a duplex.

Will go back and live in one side once the construction's complete and potentially sell the second half, though whether or not this happens will depend on cash flow and also CGT implications.

How would you calculate CGT on this basis?

Place was originally his PPOR so no CGT there, then 50% of build cost (or more) relates to PPOR, so is it the taxable gain just sale price minus a portion of the build cost?

 

[Terry_w]

Because it will be vacant land he could lose the CGT exemption on the part he doesn't live in.

 

[Paul@PFI]

G'day All,

Asking on behalf of a friend:

Bought a property in Sydney, has lived in it for a few years, now has moved out, demo'd property and is building a duplex.

Will go back and live in one side once the construction's complete and potentially sell the second half, though whether or not this happens will depend on cash flow and also CGT implications.

How would you calculate CGT on this basis?

Place was originally his PPOR so no CGT there, then 50% of build cost (or more) relates to PPOR, so is it the taxable gain just sale price minus a portion of the build cost?

Terry's comment is correct in respect of the main residence exemption (which ended) but I would be concerned that there could be some issues with CGT now. There are a heap of tax issues relating to this proposal. I always ask the question : Why would you build a duplex and sell one half ? Do you expect to make any $$ ?? If not, why do it. My reason for that question concerns how it may be taxed. Sell half to make sufficient gain to payoff his home is the worry - He is now trying to make a profit. Even if he pays down debt as an outcome its the same. The ATO view doesn't need a regular sale of property for this to be a property development enterprise. Just one can do it. Its different perhaps if he demo's, subdivds and sells the vacant land. But building to sell and make a profit has to be a reasonable expectation or why would he bother ? Right. His aim is to make a profit. And he has already started.

Your friend may have had a main residence but that ceases when he moves out and demo's it. Now you have land - A CGT cost base that he can influence !! But it can come with some problems in making that choice. You may trigger a CGT event (or have a new CGT asset (a rollover)....His intent may affect how its taxed too. And if GST applies.

That's right. GST. See he has an enterprise. He has built a property to sell. He may (likely !) have to pay GST on the portion he intends to sell. It may be reduced by GST on the build and how you chooses to calculate GST also. But if he doesn't make the right choice he is stuck with a high rate of GST and that comes off profit. Making right choice can save $.

How do you work out the profit / loss on land on each half.
How do you work out the profit on each half after build
How is any profit taxed

Personal tax advice is a real must. Probably months ago but now would be ideal.

 

[Television]

Terry, Paul,

Thanks very much for your input, it's much appreciated.

 

[Terry_w]

It may even work out better if yu could sell the property to a related party before doing anything - spouse A sell to spouse B for example (another good reason not to jointly own property).

 

[Hodge]

It may even work out better if yu could sell the property to a related party before doing anything - spouse A sell to spouse B for example (another good reason not to jointly own property).

Terry, this is interesting. Could you explain the benefit of this?

 

[Terry_w]

Terry, this is interesting. Could you explain the benefit of this?

If you have lived in it you could sell it to X possibly CGT free. You can the benefit of having lived in the property and the exemption.

X then develops and sells. Cost base is reset.

X could be a trustee, but a trust owned house would mean CGT exemption is lost going forward and there could be land tax issues if living in the property.

If X is a spouse...

Seek advice - preferably not from someone at a BBQ with no knowledge or training or insurance.

 

[Terry_w]

I should add that in some states there is no stamp duty on a transfer between spouses.

 

[Hodge]

Thank you Terry, good to know.

 

[Paul@PFI]

It may even work out better if yu could sell the property to a related party before doing anything - spouse A sell to spouse B for example (another good reason not to jointly own property).

There may also be a CGT event that allows the MRE to be taken and a high cost base set for the dev. No duty.

 

[Terry_w]

There may also be a CGT event that allows the MRE to be taken and a high cost base set for the dev. No duty.

Excellent point Paul

 

[neK]

Sorry, what does MRE stand for?
I googled it and got Meals, Ready to Eat.
Some how it doubt that's what you are referring to

 

[Terry_w]

Sorry, what does MRE stand for?
I googled it and got Meals, Ready to Eat.
Some how it doubt that's what you are referring to

Main Residence Exemption

 

[Paul@PFI]

One of two questions you can use in Seek to filter job applicants for tax roles:

- What does MRE refer to ? (Main Residence Exemption)
- What does PSI refer to ?? (99.99% of foreign skilled applicants will say Pounds Per Square Inch and not explain personal services income)