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Would this be a good investment move?

If I move into an investment property than sell half as a development site will I avoid Capital Gains Tax?

  • In Australia we have a tax on Investment property sold to make a profit, strange but true! I have an investment proprty which I bought 7 years ago & lived in initially for 3 years, its been rented out for 4 years.Its zoned as a unit or townhouse site, so to avoid Capital Gains tax when I sell half to a developer Partner can i move back into it & claim Principal place of Residence exemptions?

  • Answer:

    Can I clarify? you are saying - upon subdividing the block of property, prior to selling the whole thing to the developer, you move back to claim the main resident exemption for the whole block - OR - you are going to sell half of the block? Unlike the property law where the land "absorbs" the property above it - CGT and main residence exemption works the other way around - it is the "abode" that "absorbs" the land. Or "sucks in" the land. Which ever term you prefer so that you can better visualise it. So when the land is not sold at the same time as the house - no main residence exemption will apply. I can go on much longer with the explanation - but the above is really the main point. Another thing - the above assumes CGT applies. When you are deemed to carry on a business ... it's possible that CGT doesn't apply - the profit goes straight to you assessable income. (I am reminded of this last point all the time - in practice, I am yet to be questioned by the ATO for this) Add:- Hi there - just to clarify - rezoning, subdividing, etc - these actions by themselves do not affect how the CGT event applies. The rule of thumb that you just need to follow for the main residence exemption to apply is - the adjacent land will need to be sold at the same time (as the same event) with the property where you live and claim main residence. So if you sell half of your property (half of the land), you can only claim the exemption if you sell the half where the property is on. Hope the above makes some senses.

Wayne A at Yahoo! Answers Visit the source

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You really need to read the how not to be a developer booklet available under free publications at www.bantacs.com.au If you originally bought the property with the intention of developing it then you will not be entitled to a main residence exemption and will have to pay full tax (no CGT 50% discount) on the profit. As you have had it for so long I assume you originally bought it as a home. If you have not covered any other property with your main residence exemption during the 4 years it was rented section 118-145 will allow you to still cover the property with your main residence exemption for up to 6 years while it is a rental (indefinately if it is not earning income) and you do not have to move back into it. The trouble is you have to have a dwelling on the property when you sell it. So selling half of the whole property to the developer will be exempt from CGT. Once you start to develop the block you will then be applying the property to a business and any profit from that point onwards will be taxed as normal business income. At this point it maybe worth considering selling the property to another entity you own. But don't forget to weigh up the stamp duty involved. Get the DA first so the market value is as high as possible (this will be the cost base for the new entity) but don't start the development. The sale to another entity would be exempt from CGT as your main residence and this would then allow you to use a discretionary trust or company for tax benefits but there will be no CGT discount from that point. Big issues, you need professional advice even before you sell to your developer friend. But read the booklet so you can pick whether the professional advicing you knows what they are talking about.

Julia

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