13 Oct Buying part of my neighbour’s land – Ken Raiss
Ken Raiss answers a question about possible tax implications when doing a subdivision by acquiring a portion of a neighbour’s land.
Kevin: This time, we’re going to answer a question from Darryl, who writes and says, “If I’m doing a subdivision on someone else’s block of land (I’m buying their back yard), what tax implications do the original owners have, assuming it is the principal place of residence, and never been rented, etc.? That is, are they required to pay capital gains tax? And does it make a difference if it’s before September 1985 or after September 1985, assuming the person has been living in the property over 12 months?”
Wow. Okay, a number of issues there, I guess. But no doubt, the man who will answer them quite easily, Ken Raiss, from Metropole Wealth Advisory
Ken: G’day, Kevin. I hope things are well.
Kevin: Yes, they are indeed. Now, what about Darryl’s question there?
Ken: Yes, great question. Well, normally, when you sell your home, there is no tax, but in this case, the circumstances are different.
The main residence exemption normally applies to the building and, therefore, the land needed for that. As such, if part of the land is sold – as in this case – it is not recognized as your main residence, and that part of the land, when sold, would therefore be subject to tax.
We would need to do a calculation to determine how much tax. What we do is we go back to the original price paid for the house and land, and then work out what the land component was, and then pro-rata it to the amount of land sold.
We would then calculate the capital gains tax after taking into account all the additional costs – such as subdivision costs, lawyers, any other special planning, or whatever – to then calculate the capital gain. If they’ve held it more than 12 months, you’d get the normal 50% capital gains tax discount. But if they had bought it before capital gains tax legislation came in – i.e. September 1985 – then there would be no tax.
So, we need to get some pencil and paper out and do the sums.
Kevin: Would you call a valuer in to do that, Ken?
Ken: Look, you would, but they’d have to obviously go back to the date of purchase, subtract the building cost to get the land components, and then pro-rata it. So, if there were 700,000 square meters of land and you sold half of it, 50% of those costs would go to the back yard that’s sold.
You’d need to do that proper evaluation because you have to understand the building cost at the time of purchase, the cost for the building, and therefore, the residual being for the land.
Kevin: Yes, okay. Well, I guess the bottom line question here from Darryl was whether or not tax is payable, and the answer to that is yes, it is.
Ken: Correct, unless, as he made out, it was bought before the capital gains tax legislation came in.
Kevin: Yes, very clear. Ken, thank you so much for your time. Ken Raiss from Metropole Wealth Advisory
Ken: A pleasure.