Is It Worth Making a House a Principle Place of Residence When The Future Plan Is to Break It down and Build a Side-by-Side

• 

  SF3 on 31/08/2021 - 13:28

  Check with your accountant?

  • 

    Bargain4Life on 31/08/2021 - 13:31

    -5

    i don't have one and i was hoping to save money by not paying for one :P

    • 

      Quantumcat on 31/08/2021 - 13:41

      +2

      Why do you think people employ accountants? To give them charity? It is to end up with more money in the end.

      • 

        Bargain4Life on 31/08/2021 - 13:45

        good point, maybe i need to change my mindset.

  • 

    netjock on 31/08/2021 - 16:16

    +2

    Enough money to build two buildings but not enough money to pay an accountant for 30 mins. Bargain of the century.

    • 

      Bargain4Life on 31/08/2021 - 17:12

      like i mentioned above, maybe i should change my mindset.
      thanks for your constructive feedback.

• 

  Bafranz on 31/08/2021 - 13:29

  First home buyer i’m taking it? Claiming grant?

  • 

    Bargain4Life on 31/08/2021 - 13:30

    No, not a first home buyer and i am not claiming the grant. More from a tax/capital gain perspective when i eventually do sell it.

    • 

      Bafranz on 31/08/2021 - 13:32

      Oh, then rent out the house you’re going to knockdown to subsidise your rent.. kick out tenants after you have all the permits for a knockdown rebuild :)

      • 

        Bargain4Life on 31/08/2021 - 13:36

        That's what i was thinking but i just wanted to make sure i didn't overlook something. I was just concerned that when i eventually do sell it, that i don't regret something that could have saved me a lot of tax later on if i just put up with the inconvenience now for 6 months.
        Also reading all this tax stuff online, i wanted to make sure i understood it correctly.

  • 

    JIMB0 on 31/08/2021 - 20:34

    a house within 15km of Melbourne CBD

    Would be too expensive to get any stamp duty relief for a first home buyer.

• 

  Porker on 31/08/2021 - 13:34

  +2

  Government may consider your new house as a 'rental' such that they apply Land Tax to it. Changing its status to PPOR will avoid the Land Tax amount/payable

  • 

    Bargain4Life on 31/08/2021 - 13:37

    aahh, thanks for that, i forgot to consider the Land tax point of view. I will check this out.

• 

  Donaldhump on 31/08/2021 - 13:54

  move into it to avoid cgt when u sell it.
  how much diff is the commute to work?

  • 

    Bargain4Life on 31/08/2021 - 14:05

    Do i avoid CGT if i build 2 on it? That's why i asking in this forum, from what i have read, i don't believe i avoid CGT because when i build 2, it become money making (build for profit) and i lose the CGT exemption that PPOR give you, but i could be wrong.
    It's an extra 45mins drive and could be 60mins once lockdown end and the traffic picks ups again.

    • 

      Donaldhump on 31/08/2021 - 15:10

      no idea, but would imagine the cgt is prorated in your favour if you do live in it.
      comutting 45 mins each way to work is better than paying rent but ymmv

      • 

        Bargain4Life on 31/08/2021 - 17:17

        If it saves me CGT, definitely better to travel the 45mins each way

    • 

      redfox1200 on 31/08/2021 - 16:25

      +1

      you can avoid CGT by never selling

      • 

        Bargain4Life on 31/08/2021 - 17:18

        Yes, good point. just keeping my options open.

• 

  bemybubble on 31/08/2021 - 14:15

  +1

  Do you need to sell 1 of them? Keep it and live in the newly built one. You control your neighbours this way >:)

  • 

    Bargain4Life on 31/08/2021 - 15:54

    I don't need to sell 1 of them, I will keep both and live in 1.

• 

  kasumi on 31/08/2021 - 14:16

  +2

  When the duplex is completed, its advisable to get a valuation done to determine the base cost of each duplex. The half u live in will be your PPOR and CGT free, however you will be liable for land tax (I'm not sure what the threshold is in VIC so if ur land value is low, you may not need to pay unless u have other investment properties in which land value may go over the VIC threshold), and you will be also up for CGT on the rented out duplex when u sell. This is where that initial valuation done at completion is needed.

  Obviously, you will be paying tax on the rent you receive on the property. Both when its at its original state and you're getting the plans/approvals/construction, and also when the duplexes are completed and you're receiving rent on the other duplex. Please factor in that the rent YOU are paying to live elsewhere while tenanting out the original property will NOT BE deductible in your tax returns, so u need to be aware if u can service the home loan/construction loans and your own rent

  Best to speak to an accountant so they can thoroughly go through your options based on your finances

  HTH

  • 

    JimB on 31/08/2021 - 14:43

    Mostly good advice.

    There's probably no need to get a valuation done for the cost base on a duplex as they generally identical, so in effect they are 50/50 on the day of subdivision. The cost base will be the actual cost base (and not any increase in land value), since upon subdivision, you lose all PPOR/CGT free status on half of the land (i.e. the investment property) even if the property was your PPOR for 20 years prior to subdivision.

    From a tax point of view, it makes little sense to build a unit in your backyard/subdivide your house the longer you own it. You're better off to sell your house with plans and permits as this will bump up the value of your house (should an investor/developer/builder buy it) and it will be 100% CGT free.

    • 

      Bargain4Life on 31/08/2021 - 16:16

      That's what i was thinking with regards to PPOR and CGT free status, but i wasn't 100% sure. I'm glad I understood it correctly.
      Thanks for your input.

  • 

    Bargain4Life on 31/08/2021 - 16:13

    OK, understood.
    After the build, the house i live in will be PPOR and CGT, but i need to check land tax and the one i rent out will be up for CGT.
    Yes, I will include the rent on the property as income. Yes, i will not be deducting the rent that i pay on my tax return.
    Thanks for your feedback.

• 

  JimB on 31/08/2021 - 14:33

  When you subdivide, you should be able use the PPOR status on the one that you will live in, assuming that it was your PPOR since the beginning.

  Living in in for 6 months for use the 6 year rule is stretching the friendship, unless there's a very good reason that you can't live there, i.e. moving interstate for work.

  The one you rent out will be fully taxable, but you can claim the 1/2 the costs including stamp duty, development costs, (loan interest, council rates, land tax, other holding costs that hasn't already been claimed while you rented it out before development) to add to your cost base when working out future CGT when you sell the investment.

  • 

    Bargain4Life on 31/08/2021 - 16:22

    Yes, i do plan to move into 1 of them straight away after it's built and it will be my PPOR.

    I'm assuming you are talking about the time before i build and waiting for approvals, from what i have read online, it appears that 6 months is sufficient to say that it's my PPOR and then due to circumstances (in my case, my work location is on the other side of the city), i am now renting it out. But i do understand where you're coming from with regards to stretching the friendship.

    ok, yep, thanks for the extra info, i will keep that in mind.

    • 

      JimB on 31/08/2021 - 16:38

      If that's the case I'd move in straight after settlement.

      After 7 months rent it out citing distance to work.

      You don't want the ATO to say it was your intention to make it an investment from the beginning by moving out after 183 days.

      Speaking to my draftsman recently, he says it will take a year or so to get your planning permit. More so, if you are trying to push the boundary on the plans or receive objections.

      Councils are busy these days with development applications and are accountable to no one.

      You can line up your ducks by getting the surveying plans and aborist reports completed before settlement.

      • 

        Bargain4Life on 31/08/2021 - 17:29

        OK, 7 months can work also. Rather be safe than sorry.
        good point with regards to getting planning permits, surveying plans and arborist report, thanks for that.

• 

  JDMcarfan on 31/08/2021 - 15:45

  +1

  DO OPTION 1. I'm doing the same, with the same idea (albeit waiting for rezoning to R3 over building side-by-side). Bought earlier this year.

  Rules for this as you've mentioned is that 1. You have to live in it 6 months and then get 6 years PPOR exemption, where you can rent but not Owner-Occupy another property
  Whilst I'm not a tax expert, I am doing my CA (completed the Tax module) and have researched the subject matter for my own needs, and my conclusion is that for the matter of rebuilding multiple dwellings, the tax rules are as follows. I'll make it an example to make more sense:

  Purchase (Total Costs incl. Stamp Duty etc): Jan 2021 : $1m
  Occupy for 6 months: Jul 2021
  Rent out for <6 years (i.e. 5 years and 364 days): June 2027
  Move Back in July 2027 (with intention to knock down and rebuild. Construction starts immediately): Value of House prior to demolition: $2m

  This $1m gain is your CG to date. As the WHOLE property is your PPOR this gain is CGT-exempt.
  From the date of demolition, the property is viewed by Tax authorities as 2 Separate dwellings and only one is CGT exempt if you occupy it.
  Ideally, get a valuer who will inflate the value of the pre-demolition property (to a justifiable point) to reduce CGT liability later

  Cost allocated to each property (lets assume equal allocation, i.e. Duplex both sides same size house and land): $1m
  House is Constructed over 6 months: Cost $800k
  Jan 2028: Cost Base per Property: $1.4m ($1m + 800/2)
  CGT assets get 50% discount if held > one year (can be sold immediately and still be eligible, just an extra gap of time anyways);
  Jul 2028: Sell One Side: Sale Price : $2m

  CGT Tax:
  Profit: $2m-1.4m = $600k
  50% Discount = 300K
  CGT taxable amount = 300k
  Other Side that you will occupy: CGT-Exempt as continuously occupied.

  If no PPOR (i.e rent out from day one)
  Cost Base per side: 900k (500k + 400k, where 500k is half the initial purchase price, as no PPOR exemption)
  Profit: $2m - $900k = $1.1m
  50% Discount = 550k
  CGT Taxable Amount = 550k
  Other Side that you will occupy: CGT Exempt from July 2027 for profits on that side.

  The Non-PPOR option, would leave your residence exposed to CGT for the non-PPOR period. This would be Jan21-Jun27, with CG of $500k ($1m/2). This is assesable.
  Obviously in this case you would aim to deflate the value of the single-standing house so that you can shift as much profit to the CGT-exempt side.

  I.e. If you were to sell both sides at the same time after living in one-side for 6 months after construction. Your profits would be:
  PPOR/Non-PPOR:
  Sale Price: $4m
  Costs of Development: $1.8m
  Gross Profit: $2.2m
  CGT Taxable Amount: 300k/1.05m
  CGT (@ 45% Top Tax Threshold): 135k/472k
  Net Profit: 2.065m/1.728m

  A pretty substantial difference and I'd argue the 340k benefit is well worth it. Now I know I've grossly inflated these values for the sake of demonstration, but values half this amount (500k purchase/ $1m Duplex) is what's happening now in Western Sydney for properties bought 8-10 years ago.

  • 

    netjock on 31/08/2021 - 16:27

    -1

    Purchase (Total Costs incl. Stamp Duty etc): Jan 2021 : $1m
    Move Back in July 2027 (with intention to knock down and rebuild. Construction starts immediately): Value of House prior to demolition: $2m
    Cost Base per side: 900k (500k + 400k, where 500k is half the initial purchase price, as no PPOR exemption)
    Jul 2028: Sell One Side: Sale Price : $2m

    Interesting numbers but I don't see how property doubles in 7 years and the cost to build in 7 years is the same as it is now?

    If you look anywhere a house that is $1m, units won't be $1m. I don't know how you expect someone who can buy a house for $2m in 2027 will pay $2m for a side by side. If I could buy the land in 2027 for $2m then build side by side for $800k. Total cost say $3m and sell for $4m total why would I buy a side by side for $2m and lose $1m in profit.

    Bring on 2027.

    I am doing my CA

    Expert in numbers eh!

    • 

      JDMcarfan on 31/08/2021 - 16:44

      I purely made up these numbers and stated as such. I did this as most people including myself understand concepts when explained with an example and just used roundish numbers so that it would appear clean and would make sense (didnt want to repeat 1m again for building costs) for those who are interested.

      Don't know why you decided to take the values I listed seriously. Wasn't trying to make an assumption of prices in the future, nor construction costs. Maybe read my response before commenting or just skip past it and don't comment.

      I don't know how you expect someone who can buy a house for $2m in 2027 will pay $2m for a side by side.

      Ignoring the $ values listed. New Duplexes and old brick weatherboard houses in my area actually trade for around the same price ($1m). Many people buy Duplexes in my area, over a single standing house, as they are typically, young/immigrant families who desire a new house but can't necessarily afford it. Meanwhile Houses are bought by investors/established families who seek to redevelop the land for personal/income purposes.

      Ofc its a trade-off between land and a new/bigger house with better inclusions. I'd expect it to slowly shift towards older houses as land values are expected to grow faster than construction costs in the L/T

      • 

        Bargain4Life on 31/08/2021 - 16:59

        JDMcarfan, you're a legend. You explained it really well with a clear example and it was easy to understand.

        Where i bought, the same thing occurs, you can buy an old and small house with big land or a new, bigger and modern duplex on half the land for the same price, so for me the numbers are plausible

        Just a couple of clarifications:
        1. "Move Back in July 2027 (with intention to knock down and rebuild. Construction starts immediately): Value of House prior to demolition: $2m"
        do you have to "live" in it for 1 month or anything like that? or straight after the tenant leaves, the demo started?
        2. "CGT assets get 50% discount if held > one year (can be sold immediately and still be eligible, just an extra gap of time anyways);"
        so the 1 year doesn't start when the dwelling is complete? Can you elaborate on the extra gap of time anyways?

        again, thanks for the clear example, it made it really easy for me to understand.

        • 

          JDMcarfan on 31/08/2021 - 19:04

          @Bargain4Life: Nps! Happy to share advice, and glad it helps.

          1. No. there’s no timeframe for PPOR to be reestablished, however a continuous 6 months is necessary to regain the exemption. I just used a month to seperate when you would value the property (I.e before demolition and subdivision) and when the construction activity commenced. The main thing is a valuation is taken when the property is a single entity in broadly the same state it began in (I.e not knocked down). Practically speaking though most projects like this experience delays at some point, or may have tenants leave early, which gives you plenty of time to get PPOR established.
             All you need for PPOR is some definitive proof that you now reside at the property (I.e utility bills/driver license) and most likely evidence that the last tenant has moved out (and not just on paper for fraud).
             Let’s say for example the tenants move out and you start construction immediately. You can prove PPOR pretty easily using the above.
             Let’s say the construction time takes 6 months. Then you could technically “move” into one side and then put it up for rent and sell/rent the other side.
             This one side could restart/continue your 6 year CGT concession as you can prove PPOR for the construction period and that was the case for >6mths

          2. The 50% discount applies for any asset that you hold for over 1 year. So if you’ve bought and held the house for 6+ years you’d meet that requirement regardless of whether it’s subdivided/rebuilt and it only matter on when you initially acquired it.
             I added the one year thing only because it’s more like a guarantee to ensure you’re eligible, in the event that the second house is viewed as a seperate/new/transferred asset.
             I only say this for event where you may buy the house as a single person but when it comes to rebuild you might be committed/married. In that case ownership may transfer from 1 to 2 people at some point (likely when you subdivide and register yourselves as owners) and be considered a new CGT event.
             Whilst I’m sure the CGT status carry over (unless there’s a financial transaction, I.e you transfer the house for consideration from your name to a company name e.g Bargain4Life Property Decelopment Co.) I included it as a fail safe.
             The gap was there to reflect that most rebuilds take at least 6 months to finish and then landscaping and fitting take place. The approx time to then list and then sell would be nearly a year anyways so you’d might as well push it out till then

          • 

            Bargain4Life on 31/08/2021 - 19:25

            @JDMcarfan: Perfect, that all makes sense.
            Thanks again for your advice.