Subdiving, building and moving into the new house … what are the tax implications?
I receive a lot of questions from people who are looking at subdividing their property and want to know if there’s going to be any taxation implications.
I’ll take you through a scenario of subdividing the property that features the house you live in initially, building a new house on the vacant subdivided land, moving into that and then selling off your original house straight away. What are the tax implications and how is it calculated?
As we discussed in our article Divide and conquer … Tax implications of subdividing your property, when you subdivide a property, you end up with two assets:
- the land with the original house on it and
- the vacant, now subdivided, land
The land with the original house(let’s call it house 1 – where you currently reside) on it is referred to as your Principal Place of Residence (PPR). As such, when you sell this asset, there is no capital gains tax applicable.
But what about the vacant subdivided land?
Many assume that when they build a house on the land and move into it (let’s call this house 2), this becomes their PPR and therefore is tax-free. Unfortunately, this is not the case. There’s a period of time of ownership that the land is vacant and is therefore subject to capital gains tax.
There are some calculations that need to take place here. Let’s say that the original property (in its entirety) was purchased in 2010 for $300,000; we need to attribute value to the two subdivided areas of the property, for example:
Vacant land area: $100,000
House 1 and land: $200,000
Remember, the ATO has significant sales data and can easily see if your valuations are realistic! We recommend getting a real estate agent or valuer involved at this point.
As the entire property was purchased in 2010 and house 2 was built in 2020, there’s ten years where this is subject to capital gains tax. If house 2 is then sold in 2030 (20 years after the entire property was purchased), there is ten years (or 50% of the time) of ownership that is subject to capital gains tax – the other ten years, the property is considered the PPR and is not subject to capital gains tax.
Therefore, you can see, it is important to have details of what the land was worth at the beginning, the costs involved with the development and the sale details, so that accurate capital gains tax figures can be calculated. Keep these things in mind before you start your subdivision plans and talk to us to help you minimize capital gains tax pain at the end!