Your home is usually exempt from capital gains tax (CGT) if you sell it due to the Principal Place of Residence (PPOR) exemption. However, if you subdivide the land upon which your home is built and sell off the vacant land separately from your home, this transaction will not qualify for the PPOR exemption.
Therefore, if you own a parcel of land and decide to subdivide it into 2 or more distinct parcels, you may be liable for CGT when you sell off the subdivided parcels. However, the process of subdividing the land will not result in any CGT liability as long as you continue to own the subdivided parcels. You will need to divide the acquisition and subdivision costs of the land across the subdivided parcels on a reasonable basis.
The example below illustrates the calculation of CGT for a subdivided piece of land:
Ivan bought a house on a 950 sqm block of land in December 2007 for $280,000 whereby the value of the house and land was $60,000 and $220,000 respectively. Ivan has lived in the house with his wife as his PPOR since the purchase and incurred $13,000 in stamp duty, legal fees and other costs.
In January 2009, Ivan’s wife felt the house was too big for the both of them and decided to subdivide the land into 2 separate and distinct parcels. Ivan agreed with his wife and proceeded to discuss with the local council and incurred the following costs for subdivision:
- Land surveyor’s fees, legal, application fees $15,000
- Fees and charges for utilities – water, electricity etc $5,000
Ivan sold the rear parcel of land in December 2009 for $150,000 and incurred legal fees of $3,000 on the sale.
Since the rear parcel of land was separate from his PPOR, Ivan is not exempt from the PPOR status and proceeded to value his properties as follows with the help of a local valuer who advised the front and rear parcels of land were 60% and 40% of the original cost since the rear parcel was slightly smaller. Therefore, Ivan apportioned the original cost of the land of $220,000 as follows:
- Front parcel = $220,000 x 60% = $132,000
- Rear parcel = $220,000 x 40% = $88,000
Ivan’s calculation of his liability for CGT for the sale of the rear parcel of land to be as follows:
CGT calculation of Total Cost Base rear parcel of land
|Cost of the land||
|40% of stamp duty and legal costs of $13,000||
|40% of surveyor’s fees, legal costs and application fees of $15,000||
|Utilities connection charges||
|Legal costs on sale of the rear parcel of land||
|Total Cost Base||
The CGT on the sale of the rear parcel of land is therefore: Sales proceed less Total Cost Base = Capital Gain
150,000 – 107,200 = 42,800
Since Ivan has owned the rear parcel of land for more than 12 months, he can reduce his capital gain of $42,800 by 50%, after deducting any capital losses which he may have incurred for other assets.
Hence, only a capital gain of $21,400 is subject to the applicable rate of CGT for this transaction.
If Ivan sells his home on the front parcel of land, then he is eligible to claim the full PPOR exemption if he has used it as his main residence during the period which he owned the property. *
* Ivan may be eligible for partial / full exemption if he rented the house on the front parcel under the Australian Taxation Office’s 6-year rule for CGT.
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