Capital gains tax (CGT) is applicable when you make a profit on the disposal of an asset. This is known as a CGT event. Therefore, it is essential to understand whether you will be liable for capital gains tax on knock down rebuild projects. If this is the case, you will need to work out how much tax you will pay and if you are entitled to any exemptions.
What is the capital gains tax liability when you want to build a new dwelling on your land, for example? How would this affect your plans for home improvement? Is knocking down your house and rebuilding on the same block likely to attract a higher CGT liability?
What is capital gains tax?
Capital gains are the difference between what you get when you sell an asset minus what you paid for it (minus the expenses incurred during the selling process). You either make a capital gain or loss. Any capital gains need to be reported in your income tax return and may raise the amount of tax you will need to pay.
The tax came into being on 20th September 1985 and applies to all assets you’ve acquired since that date.
How does it affect you as a homeowner?
According to the Australian Tax Office (ATO), your main home (where you reside) is exempt from capital gains tax unless you’ve used it to earn rent or run a business, or if the dwelling is on more than two hectares of land.
What about capital gains tax on knock down rebuild projects?
The same will apply if you dispose of your home, which has been demolished and then rebuilt. However, according to the ATO, a number of caveats apply:
- You have to have been eligible for the full main resident exemption on the original dwelling when it was demolished.
- The replacement dwelling on the land must become your new residence as soon as possible once completed.
- It must continue to be where you live until you sell it.
- The new house must be your main residence for at least a period of three months after you move in.
- You must “treat the vacant land and new dwelling as your main residence for the period starting when you stopped occupying the previous dwelling and ending when the new dwelling becomes your main residence, and this period is four years or less” (ATO).
- When you come to sell the land, you dispose of both the new house and the land at the same time.
What about knock down rebuild on investment properties?
You will attract a CGT levy when you dispose of the asset if you intend to demolish and rebuild a property used for rental purposes. However, you may be entitled to certain exemptions.
If, for example, you have owned the property for more than 12 months, you may be eligible for a 50 per cent discount. Check with the ATO website or an accountant for more information. You can estimate your capital gains using an online capital gains calculator for your investment property.
Please note this information is meant as a guide only. Always seek professional financial advice before carrying out any demolitions or renovations that may affect whether you will attract a capital gains tax.
Champion Homes have been building homes, such as duplexes, in the Sydney region for over 20 years. Are you thinking of demolishing the current dwelling on the land and then rebuilding? Would you like to hear more about the investment and residential advantages of a duplex? Please contact us here to book a no-obligation consultation with our experts.