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Subdividing your main residence – Tax Tricks & Traps

We all know you do not pay tax when you sell your main residence, but tax treatment is much more complex if you subdivide and sell one or both of the subdivided lots.

There are the most common scenarios of subdividing your main residence:

1. Continue to live in the main residence and sell the second block

You continue living in your main residence and sell the other block of land. You do not pay CGT on the block on which your main residence is situated.

However you are liable for CGT on the second block from the date of the subdivision.

2. Build a dwelling on each block and move into one block and sell the second block

You build a dwelling on each block and move into one of the dwellings use it as your main residence after completion.

Your replacement home retains the main residence exemption provided you rebuild and move in within four years of your main residence being demolished.

3. Sub-divide pre-1985 Main Residence
If you are one of the lucky people who purchased your main residence prior to 20 September 1985 then there are no CGT consequences when you subdivide. This applies for both main residence block and the investment block.
BUT if you purchased only the land prior to 1985 and you built your home after 1985 then you will pay a proportionate CGT amount on the investment block when you sell it.You are liable for CGT on the second block from the date of subdivision.

Calculating CGT on the investment block

Subdividing land is not a CGT event if you retain ownership of the subdivided blocks. Therefore, you don’t make a capital gain at the time of the subdivision. It is only when the lots are sold that CGT issues arise.

The date you acquired the investment block is considered to be the same as the date that you purchased the original WHOLE parcel of land.

When calculating CGT for the investment block, the cost base is the original land divided between the subsequent blocks on a ‘reasonable basis’. Ie a relevant proportion of the value of the land when it was purchased.

CGT discount
Provided you did not purchase the original property with the intention of later sub-dividing you will be entitled to the full CGT discount.
A mere possibility that you might later sub-divide does not mean that you are not entitled to the CGT discount.

Given the complexity of these issues and the varying treatment of different periods of time and use of the dwelling/s, it is easy for people to unintentionally trigger potentially significant adverse tax consequences, if they are not properly advised on how best to proceed right from the outset.

Our lawyers here at Waterhouse Lawyers are experienced in providing advice on tax issues for property development, subdividing land and CGT main residence exemption claims, so we are here to help manage these risks. Please contact us on 02 9252 8746, tax@waterhouselawyers.com.au or through our contact page.

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