Subdivision and CGT

From: Pierre .

Hi All. I'll put this one to my accountant, but I thought I'd open up a new thread to discuss subdivisions and CGT.

I've just had an offer accepted on a property that was originally marketed as two properties. The property has an 1100m2 block with a 4x2 house on the top, and room for subdivision and another house on the bottom (block runs from one street all the way to the next). The vendors have a DA for subdivision, plans for a house to be built on the subdivided block, and a BA for the house to be built. All approvals are in place for the subdivision to go ahead, the forms are filled in, and all I need to do is submit the forms with the $8500 or so the council wants to get the subdivision finalised.

Now, rather than buying the properties separately or just one of them, I am buying the whole parcel on the condition that all paperwork relating to the subdivision is transferred to us on or before settlement. We will then decide if and when we wish to subdivide, and whether we will build the proposed house on the subdivided parcel before selling it off.

So, questions...

What effect does subdividing a parcel of land have on the value of the house / land left after subdivision?

Obviously the CGT event occurs on sale of the subdivided parcel, but how is the total gain calculated? Does the ATO require valuations of the two new parcels post-subdivision. If so, I would assume the sum of those new valuations would equal the total sale price for the purposes of calculating CGT payable.

For the finance brokers out there - will the bank be concerned about losing 460m2 of the 1100m2 of land in the original property I purchased, or will they only be concerned if the subdivision significantly reduces the value of the original parcel and property?

Any takers?

Any experience or advice? Please share.

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Reply: 1
From: Pierre .

Thanks for the reply Michael, I was beginning to think I was never going to get one!! How sad.

You raise some questions which I could have answered in my original post, but I didn't put figures in there. I'll elaborate with a few more details ...

The property is currently one title. The owners had all the approvals in place for subdivision and were marketing it as two properties. The house was for sale for $230,000 and the subdivided land bit for $100,000. If they had sold either, they would have submitted the forms, paid the costs and subdivided - allowing them to sell off the bit that was sold.

They were keen to sell, and we finally agreed on $217,500 for both properties. I have the choice of taking it as one property (which it is at the moment), or paying an additional $8500 to the vendor - they submit the forms, pay the fee, and we get the house and the vacant block. At the moment we think we'll just take the first option to give us the flexibility of subdividing when we want or developing and selling when we want. If we do that, I s'pose we'd have to nominate a contract price for each property (say $150,000 and $67,500). I think the land is worth more like $70000 than the $100000 they were asking, but I also think the house is worth $230,000 even without the extra bit of land. So, I'm in a bit of a quandry.

The house is let at $295 per week, so at a notional price of $150,000, its a good return. I s'pose I could buy the properties subdivided at the prices noted above and sell the block for $70,000 (making profit of just $5,000 for the purposes of CGT). Perhaps I could even rent the house for a year or two, move in an establish it as principal place of residence, and then just keep it or sell it free of CGT (as PPR).

To answer your other questions:
1. Yes, the area is very 'burban. Mainly large family brick homes. Lots of very nice houses.
2. Most blocks are big - 700 - 1100m2, however, many are steep and the usable area is often much less than the block size.
3. Yes, our block is one of only a couple in the area that can be subdivided - quite unique. The chopped off bit is still 460m2, and is comparible in usable area to the block next door.
4. Renovation can be done - in fact, the house has already had a very large nice new kitchen installed, and terracotta tiles throughout. It still needs bathroom updates, whitesetting and painting exposed brick 'feature' walls, something done about some bloody aweful timber panelling in one of the rooms, and some automatic openers put on the garage doors. Minor cost to really modernise it and add value.

Plenty of options I know. Any more ideas??

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