Hi All,
I have a wierd CGT/PPoR situation that I haven’t yet found any related guidance on the ATO site or the Internet in general… I’ve read the “CGT on PPOR ?” article, the ATO site and the BANTACS CGT booklet without finding a solution – although all very informative!
The scenario:
– My partner and I currently live in our PPoR that we purchased in November 2001 (and have lived in for the entire time) – referred to as property A.
– We purchased a vacant block of land in March 2004 – referred to as property B.
– We are in the process of relocating the dwelling from property A to property B (estimated to be the end of September 2004).
– We intend to sell property A as soon as the dwelling is removed.
– We intend to sell property B as soon as we can (after the house is made livable – no sooner than the end of October 2004).
– We would prefer not to live in property B for any period of time, but could ‘survive’ for 3 months if need be (we are even happy to leave the property vacant for a few months rather than live in it).The desired outcome:
– Minimise (if not avoid completely) any CGT.The thoughts thus far:
– As property A has never been rented, we ‘should’ be able to claim it as our PPoR without any CGT implications even if we move out of it (if this was our only property)?
– As we have 4 years to build on property B (and then live in it for 3 months) we ‘should’ be fine from a CGT perspective (if this was our only property)?
– There is a “Destruction of dwelling and sale of land” rule that applies if your PPoR is accidently destroyed and you choose to sell the (now vacant) land, but we are intentionally moving the dwelling so this doesn’t seem to be applicable (intentional is obviously not an accident) nor is an intentional move/destroy scenario presented.
– Due to unforseen delays, we cannot use the 6-month “Moving from one main residence to another” rule to avoid CGT on both properties (as the dual-ownership period is likely to be 7+ months)I’d be happy to supply cost/value information if useful.
Any thoughts/help on achieving our desired outcome would be greatly appreciated.
Jason, I’m thinking Property A would be CGT free, as it is your PPOR… And selling only the land would presumably mean you sell for less or about the same as you bought the whole lot for anyway….
Property B I’m thinking would have CGT implications…..
Although, you might be able to claim Prop A as PPOR from purchase until (say) August 2004, and then Prop B from then on…..
It can depend on when you sign the contract to sell your (newly) vacant land – that constitutes sale date.
I would definitely be contacting a CPA to ask how is best to structure this BEFORE you sell!
Cheers
MelThanks Mel.
Property A is worth around $150k more now than when we purchased so CGT could be painful on this property (depending over what period the CGT applies). FYI, this block is worth more without the house as it doesn’t suit the street-scape so would most likely be removed/demolished by the purchaser anyway (already been done in our street).
In regard to Property B, I’m thinking if we don’t use the six-month dual-PPoR rule, we would need to pay CGT on any change in value between the purchase date and the date we sell property A. However, if the ATO makes us factor in the house now on property B (costing $100k, increasing value by $150k) suddenly our should-be-PPoR profit on property B of $50k becomes at risk of being considered ‘income’ and therefore attract CGT.
This is still assuming we can contine to state property A as our PPoR after we move the house off it… (I have concerns here)
We’ve now booked in to see our Accountant on Friday, so hopefully she can provide some advice (although I’m thinking that I will need to find a property-savvy Accountant for more firm advice). I’ll post the results after the meeting.
Cheers,
Jason.jasonamurphy,
What a challange. I’ve had to break this into bite size chunks. As I work through them it seems to me you gain much more benefit from leaving the PPOR gap on your first home. But in case I am missing a possible scenario I have included all my references so the discussions can open right up on what you should do.
You will need to crunch the numbers but I think your CGT bill will be minimal if you say Property B is exempt as your PPOR for the whole period of ownership by using the 4 year rule under section 118-150. But you can have no other main residence during that time other than the 6 months overlap under section 118-140 which you are entitled to even if the actual overlap is 7 months it is just a case of one of the properties being exposed for 1 month. The 6 months overlap period is the 6 months immediately before the sale of property A. For example lets assume you sell property A in Oct 04. It will be exempt as your main residence from Nov 01 to Feb 04 and again from May 04 to Oct 04. That is two months in a 35 month period. Only 5.7% of the gain is subject to tax and thats before the 50% discount. Then there is attacking the gain. Section 110-25 allows you to increase the cost base by interest, rates, insurance, repairs & maintenance incurred during the whole period of ownership. Once you have finished with this you will probably be saying what gain? In the meantime no CGT on property B as it has been your PPOR right from the start and you can sell in less than 12 months but you must live there for 3 months.If you can’t BAN TACS at least minimise it legally
References for debate:
Section 118-140 The 6 months overlap rule starts backwards from the date of sale for 6 months regardless of period of actual overlap. But
to qualify:
1) The first home must have been your residence for a continuous period of at least 3 months in the 12 months immediately preceding the date of sale.
2) If you were not living in the first home at any time during the 12 months preceding the date of sale it can not have been used for producing income (i.e. rented out or used as a place of business).
Note section 118-140 is not optional it must apply so if you have made a capital loss during the period of overlap you cannot claim it.Section 118-150 A vacant piece of land can be covered by your main residence exemption for up to 4 years before you finishing building a dwelling on it, if:
1) You move into the dwelling as soon as practical after it is completed.
2) You continue to use that dwelling as your main residence for at least 3 months before it is sold.
3) During this time you are not using your main residence exemption on another property though note you are still entitled to the overlap of 6 months under Section 118-140 above.Section 108-55 The relocated home becomes part of the land. Therefore its acquisition date is the date you purchased the land.
ID 2002/514 if the demolition expenses were incurred to enhance the value of the land, and are reflected in the state of the land when it is sold, they are included in the cost base, even when incurred to facilitate the construction of another dwelling.
TD 1999/79 the demolition of the house is a CGT event. But it does not create a capital loss unless money is received for it (ie insurance).
ID 2002/633 says that this is because the building has a zero cost base. Subsection 112-30(5) the original cost base is attributed to the remaining part (ie the land).
[email protected]
http://www.bantacs.com.auIf you can’t BAN TACS at least minimise it legally
jasonamurphy,
Re reading your question I realised that I got so carried away with the overlap issues I completely forgot about the fact that you would no longer have a house on property A when you sell it. This does create a major problem. I note with concern that ID2003/322, ID2003/214 and ID2003/466 suggest that you will not be entitled to any main residence exemption at all on property A. This comes from SECTION 118-165 Separate CGT event for adjacent land or other structures
118-165 The exemption does not apply to a *CGT event that happens in relation to land, or a garage, storeroom or other structure, to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the dwelling or your ownership interest in it.
On this basis it looks like you may have to set up a caravan on the land and sell that with the land. Very messy! I recommend an ATO ruling application.
[email protected]
http://www.bantacs.com.auIf you can’t BAN TACS at least minimise it legally
jasonamurphy,
Confirmed today with peers that definately no main residence exemption for the sale of vacant land no matter how long you had a house on it. So CGT applies to the whole transaction but if you live on the land in a caravan and sell the caravan with the land you can rectify the situation. Watch the Sunday Mail for me having a winge about this one. Thanks for the idea.
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