Putting a duplex development onto a site that was previously a main residence can throw a lot of tax issues at you.
In a duplex development when does the main residence exemption stop or start? Especially if the owner moves back into one of the duplexes as his main residence again? Does the main residence exemption then run through all the way through? These are just some of the questions Damien Lehmann of Andreyev Lawyers in Sydney will discuss with you.
Here is what we learned but please listen in as Damien explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Let’s use the same example as we did in ep 326 and 327. Bill owns a house in Darwin as his main residence, which he bought in January 2000 for $200k.
In January 2021 – market value $2.2m – he moves out to make way for redevelopment. Two townhouses are being built, a duplex – A and B (construction cost $4m). So total cost is $4.2m. $200k for the land and then $4m construction cost.
The market value when all is finished is $8.2m. So per Duplex you have:
Market Value $4.1m
Cost $2.1m (land $100k + $2m construction)
Capital gain $2m
Bill moves into townhouse A. Townhouse B gets rented out or sold.
Scenario #1 – Bill Develops
Bill develops and just pays the builder the $4m to build (contract for service).
Scenario #2 – Joint Venture
Bill and the builder enter a JV. Bill contributes the land and the builder the construction cost and at the end each gets one house. Each might intend to either hold or sell.
Scenario #3 – Builder Develops
The builder buys the land for $2.2m and then develops. And Bill buys A back. Highly unlikely since you incur stamp duty twice, so we won’t dwell on this scenario and instead focus on # 1 and # 2.
So these are the scenarios we discuss in this episode.
The following are just very rough notes for now. Please listen to the actual interview to get the full gist of what Damien is sharing with you about duplex development in this episode.
# 1 – Capital or Income
Whether on capital or income is the first big question in any property development project. The builder is most likely on income in all three scenarios.
In Scenario #1 and 2 Bill is most likely on capital for A and on income for B (through CGT Event K4 under section 70-30 ITAA97). And in Scenario #3 Bill is on capital until he sells (CGT Event A1).
A question we didn’t cover in this episode is a profit making venture. Bill might not be deemed to run a business, but instead just engage in a profit making venture. What that means we need to cover in another episode.
# 2 – Main Residence Exemption
In Scenario #1 and #2 (if the JV contract is worded correctly) Bill can most likely claim the full main residence exemption for A.
The question we didn’t cover enough is whether B gets no exemption at all or an exemption up to CGT Event K4 in scenario 1 and 2. Damien points at that Lot B gets no main residence exemption at all, not even up to the time of K4, but we will cover this in more detail soon.
And in the third scenario Bill gets the full main residence exemption for the entire property.
# 3 – CGT Event K4
# 4 – Land Holding Cost
# 5 – GST
The builder is most likely subject to GST, possibly using the margin scheme. Bill might be subject to GST in scenario 1 and 2 for lot B if he runs an entreprise.
These are just some very rough notes about this talk with Damien Lehmann about duplex development. Please listen in since Damien goes into a lot more detail.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 29 November 2021