How capital gain calculated for subdivision?

[evisional]

I need you advice to structure my loan, depending on how CGT is calculated.

My PPOR has just been subdivided. There is an existing house in the front. I will live in the existing house and new house will become an investment property. I wonder how the capital gain is calculated when the IP is sold. Should CG is calculated as follows:


Purchase price: $350,000
Subdivision cost: $40,000
-----------
Total acquired cost: $390,000

I got the appraisal letter from local estate agent stating that:

Existing house on front land (unit 1) : $400,000
Land at the back (unit 2): $250,000

The acquired cost allocated for each property:

Unit 1: 390K x 400K /(400K + 250K) = $240K
Unit 2: 390K x 250K /(400K + 250K) = $150K

Construction cost for unit 2 will be around $300,000

Total cost for unit 2: $150K + $300K = $450K

Selling price for unit 2 i.e $600K

Which one of these following method is correct for CG?

Method 1

selling price - acquired cost - construction cost

$600K - 450K = $150K

Method 2

(selling price - Land value at the time converted to IP - construction cost)

600K - 250K - 300K = $50K


If I nominate the existing house as IP and live in the new unit, how to calculated the CGT for existing house when it is sold? For example, selling price is $500K


Method 1
CG = (selling price - acquired cost)
=(500K - 250K) = $250K

or
Method 2
CG = (selling price - property value at the time converted to IP)
= 500K - 400K = $100K

 

[wobbycarly]

Does this answer the question?

http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf

 

[evisional]

Thanks wobbycarly

 

[evisional]

I have subdivided my PPOP. A new unit will be built on the rear land soon.

A real estate agent told me that if I sell the existing PPOP and move in the new unit as soon as the new unit is built, there will be no CG payments for the existing house and the new unit as well because both are PPOP. Is this correct?

 

[wobbycarly]

I have subdivided my PPOP. A new unit will be built on the rear land soon.

A real estate agent told me that if I sell the existing PPOP and move in the new unit as soon as the new unit is built, there will be no CG payments for the existing house and the new unit as well because both are PPOP. Is this correct?

Why would you take tax advice from a real estate agent? Or from some anonymous post on the internet?

But this may be correct... check with your accountant!

 

[evisional]

Why would you take tax advice from a real estate agent? Or from some anonymous post on the internet?

But this may be correct... check with your accountant!

I want to ask question and the answer will be shared but yes, I will to ask my accountant.

 

[matto_]

Lots of people in this world and obviously on t-interwebs are happy to give advice. Always good to confirm said advice with a professional to ensure the validity and accuracy of it.

 

[wobbycarly]

Sorry was having a bad day - shouldn't have responded quite the way I did.

 

[evisional]

Max Newnham from BrisbaneTimes and my accountant also gave the same advice as follows:

(source:http://www.brisbanetimes.com.au/mon...erty-avoid-these-tax-traps-20100707-zzuy.html )

Q. I have a house with a big backyard and managed to get a permit for a two-storey townhouse two years ago. Construction has finished and I moved into my new unit last month. The construction loan was added to my old home loan. From a tax point of view what is my best option?

If you subdivided and rented your old home you would only get a tax deduction for the interest payable on the small proportion of your original debt.

A. To answer your question it is first important to establish what you are trying to achieve. If you want to make your life as financially simple as possible, and reduce your non-investment debt to a minimum, it makes sense to subdivide the property now and sell off your old home.

By doing this now the profit you make on the sale of your old home will be tax-free. The proceeds from this sale can then be used to pay off the debt on that home and also the construction debt on the new unit. As this unit is your new principle place of residence any profit you make when it is sold will also be tax-free.

Read more: http://www.brisbanetimes.com.au/mon...se-tax-traps-20100707-zzuy.html#ixzz22sHCRgtE

However, this publish (1990, p8) at http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1012&context=rlj

page 7 said that

"Where a taxpayer acquires a legal or equitible interest in vacant land after 19/9/85, and subsequently erect a dwelling on it, which become the taxpayer's sole or principal residence, as soon as practicable after the dwell is erected, the vacant land will effectively to be deemed constitute the sole or principal residence of the taxpayer"

...
page 8 said that

"Where a taxpayer owns another home during construction period and the taxpayer has elected that the exemption apply to the new home, no sole or principal residence exemption is available for that other home during the period after which election has been made"

This publish mentions about the vacant land generally. I wonder if this publish applies to the vacant land resulted from subdivided or purely applies to new acquired vacant land. If it applied to the subdivided land, this will conflict with advice of Max Newnham from BrisbaneTimes??

 

[Rob G.]

I have subdivided my PPOP. A new unit will be built on the rear land soon.

A real estate agent told me that if I sell the existing PPOP and move in the new unit as soon as the new unit is built, there will be no CG payments for the existing house and the new unit as well because both are PPOP. Is this correct?

I am glad that real estate agents can help you with tax advice.

I have noticed recently that they can also help you set up a borrowing arrangement within your SMSF to purchase a property they happen to have.

What your estate agent didn't tell you is that when you sold your old main residence, only the land underneath it qualifies for the main residence exemption.

When you sell your new main residence, there will be a capital gain in relation to the land underneath for the time prior to the subdivision.

In the meantime, I am going down to the milkbar to get some free financial advice.

Cheers,

Rob

 

[evisional]

What is funny here? )

I did not consider what real estate agent told me as an advice or help me anything. Real estate agent just chatted with me, gave an idea and told me to check with my accountant. I talked to my accountant but have not got the reply yet. In the meantime, I wanted to get more references from other sources i.e ATO website, forums, and Lawyers' publishing.

I agree that the information from Internet sources is not reliable and is just for reference but it not harmful to collect the idea from different people/sources and then check against more reliable sources. As I know, the forum's function is to share the knowledge.

Cheers

 

[dan c]

You've done the right thing in checking with your accountant. Unfortunatley, a lot of people don't and make decisions based on what they were told by the real estate agent.

When the accountant has to fix up the mess, the client often says, "But the real estate agent told me...."

 

[Cloudy_]

Does this answer the question?

http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf

Just what I was looking for... Cheers!