05 May 2016

Main Residence Exemption Part 2 – Adjacent Land

In the event that adjacent land is split from a taxpayers main residence and separately sold, a capital gains tax event will occur, even when the original block is less than 5 acres.

Case Study
Bob acquired a residential property on 2 acres for $1 million, it has been his main residence for the entire ownership period, 4 years. The property encompasses two adjoining titles, Title 1 includes the dwelling, Title 2 includes a swimming pool, a shed and other facilities but no part of the dwelling.

Bob has now been offered approximately $1.5 million for the sale of the second title on its own. He seeks guidance on the capital gains tax consequences of selling the second title and in particular, whether a main residence exemption is available to him. He does not intend to sell the first title which will be retained and will remain his main residence.

Capital gains tax will apply to this sale and a main residence exemption will not be available. The actual cost base of the portion of land will need to be established. It will be a reasonable portion of the purchase price paid for both lots plus a proportion of associated cost base items incurred on the property since. As the property has been owned in excess of 12 months, a general 50% CGT Discount will be available.

Notably, should Bob sell both titles to the same purchaser under the one contract, a main residence exemption would be available.

Should you wish to discuss further please feel free to contact Andrew Marshall or Janine Orpwood on 5427 8100 for an initial consultation.