Divide and conquer … Tax implications of subdividing your property
The ‘quarter-acre block’ may have been the great Aussie dream post World War II, but for many, this amount of land it too much to handle. The opportunity to subdivide and selling in order to pay down debt or fund other plans is therefore an attractive strategy to those burdened with too much land.
While selling a house you have lived in – your Principal Place of Residence (PPOR) – is normally Capital Gains Tax (“CGT”) free, subdivision has potential taxation implications if the property was purchased after 20 September 1985.
What happens when you subdivide?
Say you have a property with a house and a large back land area. When you subdivide the property, you end up with 2 separate assets with separate titles as follows:
- Land with house on it
Assuming you are still living in the house this will remain your PPOR and is therefore exempt from tax.
- Land-only
This is now a separate asset and no longer your PPOR, therefore this is subject to Capital Gains Tax (“CGT”). What is important to consider is that the date you originally acquired the property is date that the ATO uses to calculate when you acquired the subdivided land, notthe date of the subdivisions.
The subdivision doesn’t trigger any taxation liability itself but does at the time of the future sale.
How do you work out the tax value of each piece of land?
The cost of the property when you purchased it is allocated between the separate titles on a reasonable basis, a real estate agent will be able to assist you with this. I go through this in an example later.
What happens when you sell?
- Sale of land with home
Assuming this is still your PPOR, then the sale is exempt from CGT, i.e. no tax on sale.
- Sale of land-only
As the land-only area is now a separate asset and no longer your PPOR, then any gain that you make on the sale of the land-only portion attracts CGT. Land qualifies for the full exemption only when it is sold with the home that is your main residence.
Remember the subdivided land is acquired at the date of the original purchase of the property not the date of subdivision.
A real life scenario:
John bought a house June 2004 for $200,000 including stamp duty and fees and lived in it as his main residence (his PPOR). A real estate agent has assessed that at June 2004 the house would have been valued at $100,000 and the land at $100,000.
In June 2019, John subdivided the land into two blocks of equal size – for which subdivision costs were $20,000 – and sold the vacant block, at the rear of the property, for $200,000 after fees.
As John sold the rear block of the land separately, the main residence exemption does not apply to that land.
The cost base of the bock of land sold is calculated, as follows:
|
Original Value of the Land |
$ 100,000 |
|
Subdivision Costs |
$ 20,000 |
|
Cost Base |
$ 120,000 |
|
|
|
|
Total Cost Base of Land Sold 50% |
$ 60,000 |
The capital gain on the sale of the rear block is calculated as follows:
|
Sale Price After Fees |
$ 200,000 |
|
Less: Cost Base |
$( 60,000) |
|
Capital Gain |
$ 140,000 |
|
|
|
|
Taxable Capital Gain (50% reduction as held for more than 12 months) |
$ 70,000 |
Assuming John lives in the house on the other block and uses it as his main residence (PPOR), when he sells he will get the full main residence exemption and be exempt from CGT.
In our next article I will cover the scenarios of where you build on the subdivided land and either rent, sell or live in the new property.
If you’re considering subdividing talk to us to see how it could impact you tax-wise.