Tax - Principal place of residence



From: M Kats

I am looking for more details regarding the tax law "principle place of residence".

When moving a house to one side of 2 x 16p lots and living in this house it would be classed as your P.P.O.R.

What happens if you then sell the vacant block?? Is it affected by Capital gains tax.

If so, I would appreciate some info on how to avoid the C.G.T.

Many Thanks
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Reply: 1
From: Dale Gatherum-Goss


Can you give me a little more information about your idea, please? I am confused and would prefer to clarify your post before I answer lest I confuse you as well.


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Reply: 2
From: Robert Forward

Hi M Kats

One thing I am aware of currently is the ATO has draft legislation in place (which seemingly they will back date to the when GST came into existence) that the subdivision will be GST'able. Actually this legislation will also effect pre-existing unit blocks that are being strata titled too.

From what I see, if the ATO are claiming that these are now NEW units is the $14k FHOG allowable???

This tid bit I got from the recent Michael Yardney newsletter. And I have my accountant confirming this at the moment.

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Reply: 3
From: Mike .

Hi M,

CGT is not a factor when subdividing land because there is no change in ownership. However, if you made a capital gain when selling the vacant block then CGT is payable.

Unfortunately, if you sell the vacant block separately, the main residence exemption does not apply to that land, unless:

1. you bought the land before 20 September 1985, or

2. you sold the vacant block together with the main dwelling.

You also said: "I would appreciate some info on how to avoid the C.G.T."

Naturally, tax avoidance is a no-no, so let's replace that word with minimise. Assuming you're an individual taxpayer and not a company, CGT is minimised by:

1. apportioning the cost base between the the two blocks. Eg: Original cost base is $250,000. The house is $80,000 and the land is $170,000. Assuming that the blocks are identical in size, the cost base of the vacant block is half, which is $85,000.

2. adding subdivision costs in the correct proportion to the cost base.

3. discounting the capital gain by 50% if the property was held for more than 12 months.

4. selling the vacant block when your marginal tax rate is low.

Don't be too concerned with paying some tax, although it does eat into your profits, the return on your cash costs to subdivide is still very high.

Regards, Mike
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Reply: 4
From: M Kats

Thank you Dale, Robert and Mike.

Based on the information supplied from the above please confirm if the following scenario would be correct.

House was purchased july 01.
If I live in the house from more than 12 months then the house is classed as my Principle Place of Residence

While living in it I can Renovate and relocate the house during this 12 month period leaving me with a 16p vacant land.

After the 12 month period the property can be sold and it would not be affected by CGT.

Now I would be left with a vacant block and no place to live. At this point in time I would rent for 6 months (at an approx cost of $6000) and begin building on the vacant block which will be my principle place of residence for the next 12 months and once again avoiding CGT.

Would this be correct?????

Thank you
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Reply: 4.1
From: Mike .

Hi M,

I agree that your scenario would avoid CGT. However, there are a couple of details with your scenario that I would like to clarify.

1. You don't have to live in your main residence for 12 months to qualify for the exemption. The ATO has not specified a minimum time a person has to live in a home before it is considered to be their main residence. Having said that, a reasonable period would be at least 3 months. Therefore, if you relocate and renovate the existing dwelling before 12 months no CGT is payable.

2. Once you have sold your PPOR, and decide that you will construct your next PPOR on the vacant block, the CGT exemption for your new PPOR applies immediately, even while you are renting. This applies as long as you finish construction and move in within 4 years. Of course, as I mentioned in the previous point, you need only live in it for approx 3 months before selling it without CGT.

The other part of the story that I'd like to know more about is the finance. If your current PPOR is mortgaged then you have an obligation to inform the lender that you are altering the title. Your lender may not agree to this if they think it will reduce the value of the property.

Good luck. Let us know how it turns out.

Regards, Mike
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Reply: 4.1.1
From: M Kats

Thanks again Mike


We have mortgage against another property to purchase this one.

The bank have advised that they will lend us the money to do the development and they will pay progress payments to the builder. Upon completion we have to sell in reduce the loan.

At this point we will be looking at refinancing to develop the vacant block.

Thanks again Mike, I will let you know how we go. The survey begins this week.

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Reply: 4.1.2
From: James Johnson

Hi Mike,
Did you say you DON'T have to live in your main residence for 12 months to qualify
for the CGT exemption. Is it something like the FHOG where you just have to show intention (to use as principle place of residence).
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