What are the tax consequences of sub-dividing your block?

BLOG - Subdividing your Main Residence - What are the tax consequences?

1. The main residence exemption generally exempts gains made on the sale of a property that was used as a taxpayer's main residence.

2. However, subdividing land which has an existing dwelling on it into two separate blocks effectively means that the main residence exemption can only be applied to the block with the dwelling on it, should the two blocks be sold separately.

3. The gain made on the sale of the subdivided property that is not the taxpayer's residence will be subject to Capital Gains Tax.

4. Consider the following example adapted from an ATO publication:

  • Kim purchased a house on a 2,000 square meter block of land in June 2003 for $350,000 ($120,000 for the house and $230,000 for the land).
  • Since the purchase, Kim has lived in the house as her main residence.
  • In January 2014, Kim subdivided the land into two blocks i.e.  A front block with the dwelling on it and a rear block. The two blocks were valued equally by a real estate agent.
  • Kim sold the rear block in March 2014 for $150,000.
  • The gain on the sale of the rear block is not eligible for the main residence exemption as it has been sold separately from the dwelling.
  • Kim's capital gain on the sale will be calculated as $150,000 - ($230,000 x 50%) = $35,000.

5. Since the property was held for more than twelve months, the taxpayer will be entitled to claim the 50% Capital Gains Tax discount to reduce the capital gain.

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The information contained above is not exhaustive and is based on conditions prevailing at the time of publication. Users are advised to consult professionals before taking any formal action. While all reasonable care has been taken in the preparation of the publication, we do not accept any responsibility for any errors it may contain, whether caused by negligence or otherwise, or for any loss, however, caused, or sustained by any person that relies on it.

Note: This information is of a general nature only and is not intended to be relied upon, nor to be a substitute for, specific professional advice.  Also as changes in legislation may occur quickly we recommend that our formal advice be sought before acting in any of the above areas.