Redeveloping your home by subdividing off a building block or demolishing and rebuilding two or more dwellings is a growing trend. Some recent matters we have been involved in show that the potential tax consequences are often overlooked.
When you sell land that you became the owner of on or after 20 September 1985, you must include any capital gain made on the sale as part of your income.
There is an exemption for land which has a dwelling that you use as your main home. However some owners mistakenly believe that if the land has been their main residence, it will always have the benefit of the exemption. This is not correct.
A common trap is to demolish the house. The taxation legislation requires that for the exemption to apply there must be a dwelling. Demolition of the house is regarded as a CGT event and a deemed disposal of the property. Generally you will not receive any capital proceeds for the demolition, so there is no capital gain or loss. But if you then sell the vacant land, or subdivide and sell the new lots, you must account to the Australian Taxation Office for any capital gain you make on the sale. Because there is no dwelling on the land, you are not entitled to claim a partial exemption for the period when there was a dwelling occupied as your main residence you sell.
If you are contemplating selling your home as a development site, or undertaking a subdivision and selling as vacant lots, the main residence exemption will only be available if the sale occurs whilst a dwelling that is your main residence remains on the land you sell.
If you decide to rebuild after demolishing the house, the main residence exemption can still be claimed if:
- you make an election to treat the vacant land as your main residence from the time the demolished house was last occupied by you; and
- there is no more than 4 years between the time of last occupation of the demolished dwelling and the time the new house becomes your main residence.
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