By brother in law purchased a house on a large block, sub-divided and built a second house in the back yard, keeping the original house.
The time line of events is as follows. The original house was rented out for the first 2 years from purchase.
After two years he moved in to the house and almost immediately sub divided the block and began construction of the second house whilst living in the original house.
The original house was then sold after 15 months and he moved in to the newly constructed house.
He is now still living in the constructed house and it has been just over one year.
He is thinking of selling the house, and his accountant has told him that because he has already sold the first house, if the second house is sold they will be up for capital gains tax.
The accountant also said if you sell two houses in six years you will have to pay capital gains tax on one of the houses and that you can choose which one to pay capital gains tax on.
Can anyone shed any light on what the capital gains tax implications are in this situation? Is the information the accountant has provided accurate?
Please help
Cheers
Hi Craig,
It sounds to me like your accountant might not be too familiar with residential property !!! I’m sure one of our knowledgeable advisers will pop in to affirm what is correct.Right off the bat, I believe the accountant might be quite wrong on this one:-
The accountant also said if you sell two houses in six years you will have to pay capital gains tax on one of the houses and that you can choose which one to pay capital gains tax on.
… but then, I am not familiar with NEW houses, with GST and other such changes – so I stand to be corrected and to learn from those with more knowledge. Also, since the first house was rented for a period, I believe there will be some CGT owing on that one – it does get quite complicated, but there can also be lots of options, so maybe not “one right answer” in this scenario(??)
Hehe – maybe the accountant is not the only one wrong here…. gulp !!! :p
Benny
The accountant is wrong.
The 6 year rule relates to absences.
where you split the land of the PPOR and end up with 2 houses the main residence exemption can only apply to one of those houses at any point in time. The portion of the land and construction cost for the new house cannot be eligible for the main residence exemption (until after living in it) as you would have already claimed this on the other property. section 118-110 of the ITAA 1997.
A new house sold within 5 years may result in GST being payable, but this is a different issue.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Benny and Terry for your help. I didn’t think it was quite correct what the accountant was telling him.
where you split the land of the PPOR and end up with 2 houses the main residence exemption can only apply to one of those houses at any point in time.
So in this example he would have claimed the main residence exemption on the original house, which is now sold. I am thinking that no capital gains tax should be payable on the sale of this house as it was his main residence when he subdivided and when he sold. Would this be correct or am I missing something?
And now with the second house, the one that has been constructed, I am a bit confused. If it is sold now is capital gains tax applicable considering that he has lived in it for over 1 year?
The portion of the land and construction cost for the new house cannot be eligible for the main residence exemption (until after living in it)
As he has lived in it for over one year does this mean he can avoid capital gains tax on this house if he sells now? Or if he would need to pay it how would it be calculated.
Thanks Terry for referring to section 118-110 of the ITAA 1997. I have tried to find answers from googling this but I’m still confused.
Cheers
The land under the second house would not have been the main residence since its acquisition.
The 1 year only relates to the 50% CGT discount – which would be calculated from the date the land was acquired usually.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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