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In pre-CGT days, my then husband and I bought a small acreage on the NSW south coast, on which we built a house in 1987. We subsequently built a substantial separate free-standing garage/workshop/studio on the same property in 1994. The property has never been our primary residence or rented out.
The property was in our joint names all this time, until we divorced three years ago when, as part of our settlement, full ownership of this property was transferred to me two years ago. The property is now on the market. I understand that as the main house was built before 1991, I cannot claim a raft of non-capital costs that we incurred during the intervening years, eg insurance, rates, etc, as part of my cost base when calculating my CGT liability on sale.
However, I am not sure how the recent change of ownership affects this, ie if I can claim all or part of these costs incurred post-2010. Furthermore, can I legitimately apportion part of the ownership costs, eg rates, to the post-1991 garage/studio from the time of its construction to the present? This is all getting quite difficult to understand, and I have sought professional advice but have been disappointed in its quality, major advisory firms even being unaware of the issue around pre-1991 construction. So I hope you can clarify this for me.
Answer: I am going to assume that your “small acreage” is less than two hectares in land size, and I am also going to assume that the garage/studio has never been used for income-producing purposes and that this property is your nominated main residence. In any event, this seems to be one asset, and as the property is now on the market for sale as ‘one whole’ in its entirety, you will not be assessed for CGT because this is your main residence.
While it is true that assets acquired after 20 August 1991 may be subject to capitalising the expenditure of the property (eg cleaning materials, rates, interest on the loan, installation, preservation, etc), in your case you will not be required to pay CGT on the sale of the property, hence there will be no need to capitalise such expenditure because you will not even be required to perform any CGT calculation in any event. The sale of your property is CGT free (in its entirety) without the requirement to capitalise any costs of the garage/studio.
CGT WHEN SELLING A COMBINED PPOR AND IP
Question: I currently own two properties next door to each other, the investment being $631,000 in value, with 100% owing, and the primary residence being $950,000 in value, with nothing owing.
The primary residence is 966sqm and the investment is 850sqm. I can subdivide both properties whilst retaining the investment property on a smaller block and increase my size and value of the primary residency. When I sell the primary residence, will I be subject to CGT, and are there any special tax laws not permitting me to purchase from my investment to gain advantage on my primary residence?
Answer: I am going to assume that both properties are held in your own individual name. If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of subdivision.
The key factor here is that you retain the same ownership titles of both properties upon subdivision of the properties, and providing you keep both properties in your own individual name, then there will be no CGT or stamp duty applicable. Also, you will be required to obtain a market valuation of the properties when you subdivide, which will essentially reset the cost base of the investment property.
What this means is that, when you sell the extended primary residence, CGT won’t apply to the original main residence (966sqm). However, CGT will apply to the increased area added from the investment property because it was originally used for producing assessable income prior to the subdivision. Although it will be used as your main residence post-subdivision, for tax purposes+ it will be assessed as two separate assets.
Please note that you will also be required to reduce the amount of tax deductible debt on your current mortgage on the investment property after subdivision. This is because there will be a change of purpose (of the loan) once the subdivision occurs.
Angelo Panagopoulos is a partner at Wilson Pateras Chartered Accountants, specialising in property and taxation, asset protection and ownership structures. Angelo has assisted many clients over a number of years with their property-related requirements. Visit www.wilsonpateras.com.au.
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