What if I subdivide my property and sell the vacant land?
If you were to sell your property which meets the requirements of being your Principal Place of Residence (PPR) as a whole (i.e. before subdivision), then there would be no taxation implications.
But what if you subdivide with the aim of selling off a portion?
As we discussed in our article Divide and conquer … Tax implications of subdividing your property, when you subdivide a property, you end up with two assets:
- the land with the original house on it and
- the vacant, now subdivided, land
The PPR status stays with the portion of land with the house on it and if you were to sell, it would be tax-free.
The vacant land was part of your principal place of residence but, in order to meet the requirements of the ATO’s definition of PPR, there needs to be a house on it – if you were to sell this, it is subject to capital gains tax (if you’d owned it for more than 12 months).
Here’s an example: a house and land package was purchased in 2000 for $300,000. We need to allocate the amount paid between the (newly subdivided) vacant land and the portion with the house and land. We could say that the land portion was worth $100,000 and the house and land portion was worth $200,000. Therefore if we sell the vacant land for $300,000, there is a $200,000 profit on the sale and is a capital gain. If we’ve owned the property for more than 12 months we need to include 50% of the profits (i.e. $100,000) in our taxation return; this, for most people in the marginal tax rates, would equate to a tax bill of $32,500.
You can see why it’s good to know what tax implications there are – if any – before you commit to selling, and, more importantly, spend all the profits!
If you’re considering this activity with your property, talk to us first – we can help you identify your potential tax obligations ahead of time!