Tax Implications on Subdivision


Consider this scenario.

A house bought for 500k.
Subdivide and build on rear block and retain.
So the value of the original house has reduced, by say 15%. This house is rented and negatively geared.

After the subdivision, I assume the bank would secure the original loan (lets say it was 100% so 500k) against both front and rear houses.

Come tax time, can I still claim interest expenses for the entire loan against both properties, I'm guessing not, but if not, how should it be calculated?

Oooh, we have this, but haven't rented the house yet, but when we do it will suck immensely as only part of the loan is for the house.

As we bought at land value with a 100% loan, we have apportioned a little under half of the purchase price to the subdivided block, and have to subtract that amount from the loan for working out interest. Its the same figures as for CGT, actually, but if you didn't have a 100% loan its going to get messy apportioning stuff out after deposits etc.

Edit to add: don't forget the actual costs of the subdivision process itself get apportioned too. Probably need to get your house valued in house and land components to get a proper idea of what is going on.
so the best bet might be to refinance in this situation?

E.g Split the loan, so that you have 80% against the front property, and 20% against the new property that you've built on the subdivided block.

So instead of having 500k secured against 2 props valued at 400k each.
Split the loan such that you have 320k secured against the rented property and 180k secured against the new property.

The downside of this I suppose is that if left at 500k secured by both props, you could feasibly claim on 100% of the value of the rented property right? So 400k instead of 320k.

So subdivision costs get split between the two properties for CGT purposes? i.e. if it costs 30k to subdivide, 15k comes off any profit of each property when sold?
Yeah, you split subdivision costs equally.

I suspect you're going to need to refinance anyway - it costs a fair bit to subdivide and a fair bit to build too, you're not going to have a single $500k loan at the end. More like $500k - 15% - fraction apportioned to rear block + 1/2 sub costs in one loan and $300k (or whatever your build will cost) + 15% of $500k + fraction apportioned to rear block + 1/2 sub costs in the other.

You don't sound like you're far into this process ...
Application for subdivision is in with planning commission, so no, not too far. We can afford to take our time since the house is rented, so holding costs not too harsh.

We haven't actually made up our minds yet whether to just sell the vacant block, or build and move in for 1-2 years before selling.

We would use cash to subdivide and build which is currently offsetting PPOR. So we wouldn't necessarily need to refinance, but in the interest of keeping the accounting under control, and not crossing loans, I think the refi to 80% is the way to go, leaving 20% secured against the new one.

Sound reasonable?