Many retirees find themselves asset-rich but cash poor. Subdividing a large property can be an effective way to access funds by selling unused portions of land. This strategy can provide capital for income-generating investments, but it's crucial to understand the tax implications, particularly concerning capital gains tax (CGT) and downsizer contributions to superannuation.
Subdivision and Capital Gains Tax
When you subdivide your land, each new parcel receives its own title and is considered a separate asset for tax purposes. Selling one of these subdivided lots triggers a CGT event. The capital gain or loss is determined by:
Acquisition Date: The acquisition date of the subdivided blocks is the same as that of the original property.
Cost Base Allocation: The original property's cost base is apportioned between the subdivided blocks using a reasonable method, such as based on area or market value.
Main Residence Exemption Limitations
The main residence exemption typically allows homeowners to exclude their primary residence from CGT, provided it hasn't been used to produce income. However, this exemption has limitations when it comes to subdivided land.
For the exemption to apply, the capital gain must relate directly to your dwelling, including the house and up to two hectares of adjacent land used primarily for private purposes. If you subdivide and sell a vacant block under a new title, it is no longer considered part of your main residence, and the CGT exemption does not apply. Consequently, any capital gain from the sale of the vacant land is taxable.
Illustrative Example
Consider a couple who purchased their home two decades ago for $200,000 on an acre block. They recently subdivided the property into two lots and sold the vacant lot for $600,000, retaining their residence on the remaining lot.
To calculate the capital gain, they allocate the original $200,000 purchase price between the two lots reasonably. The sale of the vacant lot results in a capital gain of $550,000.
Since the main residence exemption requires that both the dwelling and the land be sold together, the gain on the vacant block does not qualify for the exemption. Therefore, they are liable for CGT on the $550,000 gain from the sale of the vacant block.
Downsizer Contribution Considerations
Selling a subdivided vacant block also affects eligibility for downsizer contributions to superannuation. To qualify, the proceeds must come from the sale of a property that was your primary residence. Since the vacant land is no longer part of the main residence, the sale proceeds are ineligible for downsizer contributions.
Alternative Strategies
Exploring other strategies with a tax professional can help optimize outcomes, such as:
Investigating subdivision methods that may allow for partial or even full main residence exemption in some cases.
Exploring other CGT concessions that could reduce tax liability.
Identifying ways to use the proceeds for superannuation contributions or retirement income.
The Importance of Professional Advice
Developing a retirement strategy that includes land subdivision requires thorough tax planning. Consulting with a qualified tax professional before commencing the subdivision process can provide valuable guidance, including:
Assessing subdivision strategies to optimise CGT outcomes.
Determining eligibility for downsizer contributions or other superannuation strategies.
Advising on tax-efficient ways to maximise retirement income.
Unlocking the value of your property's land can be a viable strategy, but it requires careful planning and professional input.
Before proceeding with subdivision plans and potentially costing yourself thousands in unnecessary tax, book a consultation with one of our Chartered Tax Advisers on 1300 022 267 to determine if subdividing is an appropriate strategy for you.