Buy the land next door retaining CGT Main Residence Exemption

Looking to buy the land next door

Looking over the fence to consider buying the adjoining land.

Buying the land next door can be a great idea to expand your wings while retaining the CGT Main Residence Exemption.

We come across clients that have purchased the adjoining block of land, either at the time of the original purchase or some time later for various life style reasons (ie), building a big pool for the family, tennis court, to expand their love of gardening etc.

At the time of contemplating the sale, an obvious question that may be asked by clients :-

Is there any capital gains, and whether the main residence exemption extends to the additional adjoining land acquired?

In many cases the answer is yes — provided that certain requirements are met (Adjacent Land subsections 118-120 and 118-165 of the ITAA97).

Provided you meet the requirements, the main residence exemption applies to both pre- and post-CGT dwellings (before and after 20 September 1985).

The requirements are:

  1. the additional land (including the area of land on which your Principal Place of Residence (PPR) is built) is adjacent;
  2. the total area of land is not greater than two hectares;
  3. the additional land is used primarily for private or domestic purposes in association with the dwelling; and
  4. the CGT event that happens in relation to the additional land also happens in relation to the PPR (you sell both properties together).

To further explain, the taxation determination (TD92/171) gives an example.

Tom and Mary purchase a home in 1987 and occupy it as their main residence. The home has never been used for income producing purposes.

In 1989, they purchase the vacant block of land that adjoins the land on which their dwelling is situated and construct a private swimming pool. The total of the area of adjacent land and the area of the land on which the home is situated is less than 2 hectares.

In 2001, they enter into a contract to sell the home with the adjoining block. A full main residence exemption is available.

Under the ATO’s “Project Refresh”, which is aiming to modernise and tighten a lot of tax legislation, the above ruling and a few other related determinations are to be consolidated - see below:-

TD1999/67 ....Land over 2 hectares, need to attribute CGT

Income tax: capital gains: if your land (including land on which your dwelling is situated) exceeds 2 hectares

 TD1999/68 ....What is considered adjacent land

Adjacent is not a word to which a precise and uniform meaning is attached by ordinary usage. It is not confined to places adjoining, and it includes places close to or near

TD2000/15 ....The extent to which adjacent land is used for private use

How to apportion if some part of the ownership period the land has not been used 'primarily for private or domestic purposes in association with the dwelling.

Please contact our office if you have further questions or would like to discuss your plans.

 

Fields marked with an * are required