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Q: I completed a subdivision development of two units in July 2013, when we moved into the rear unit. The front unit was rented out from September 2013 until June 2014. We accordingly claimed negative gearing for that period. In September 2014, we sold our rear unit and moved into the front unit at the same time. We still live in that unit. So, basically the front unit (townhouse) was rented for about 10 months and then we have lived in it ever since.
Question: based on the scenario above, if we decide to sell the property within the next year, what amount of CGT should we expect to apply for the front unit where we currently reside?
Thank you, Nenad
A: From the information provided above, I understand that you acquired the block (i.e. the land and dwelling) on capital account, demolished the existing dwelling and constructed two residential units, A and B. You then moved into Unit B upon its completion in July 2013, and occupied it as your main residence until it was sold in September 2014 (you should seek specific advice from an accounting professional as to whether this transaction is on capital account or income account, and also as to whether this transaction could be considered new residential property for the purpose of GST. The following advice assumes you have sought such advice and this transaction is on capital on capital account and not subject to GST).
Unit A was rented from September 2013 until June 2014, and then occupied by yourself as your main residence following the settlement for Unit B.
I also understand that the main residence exemption would have applied to the sale of Unit B under the Income Tax Assessment Act 1997 sections 118–110 and 118–150. The following advice has been prepared on this understanding.
You would be eligible for a partial main residence exemption when you dispose of Unit A in the future, under section 118-190, as you have used the dwelling for income-producing purposes prior to occupying it as your main residence.
The cost base of the original larger block would have been allocated between Units A and B when they were constructed and subdivision occurred. I understand that this may not have been previously considered when Unit B was sold, as any capital gain realised would have been treated as exempt by yourself, the taxpayer.
“The 50% general discount should be available to reduce the capital gain”
The first element of the cost base and reduced cost base for Unit A would include a portion of the acquisition cost for the original larger block, based on what portion of that block was subsequently occupied by Unit A. You would add to that any other expenses incurred which formed part of the cost base under section 110–25, e.g. a portion of the costs relating to
the subdivision of the block (e.g. DA approval), architect fees to design Unit A, the construction costs that related specifically to Unit A, for which you had not previously claimed a deduction.
For example, council rates relating to the subdivided block upon which Unit A stood would have been deductible when it was rented out and therefore would not be included in the cost base, whilst non-deductible council rates during the period that Unit A was occupied as their main residence would be included.
The 50% general discount should be available to reduce the capital gain, after application of any current or prior year capital losses under section 102–5.
Whilst the services of a registered valuer is not specifi cally required for the allocation of the cost base to the subdivided blocks occupied by Units A and B, you may wish to engage the services of a professional with experience in this area (i.e., valuer, real estate specialist, etc). This will give you an independent assessment of the allocation value of the land at that time, in case of future query by the ATO.
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