Many retirees find themselves cash-poor but asset-rich. For those living on larger properties, subdividing and selling unused land can be a potential retirement strategy to generate funds for income-producing assets. While this approach may suit some circumstances, it’s crucial to understand the capital gains tax (CGT) implications and downsizer contribution limitations.
When you subdivide a block of land, each new block receives a separate title and is treated as a distinct asset for tax purposes. Selling a subdivided block triggers CGT. To calculate the capital gain or loss:
Typically, selling a main residence is entirely exempt from CGT if it hasn’t been used for income-producing purposes. However, this exemption may not apply to subdivided blocks.
The CGT main residence exemption requires that the capital gain relates to your “dwelling”, which includes your home and up to two hectares of adjacent land used primarily for private or domestic purposes. This two-hectare limit includes the land beneath your home. Consequently, if you subdivide and sell a block of vacant land on a new title, it’s no longer considered part of your dwelling and doesn’t qualify for the CGT main residence exemption.
Anusha and Previn purchased their home on two hectares of land 20 years ago for $100,000. They subdivide the land into two lots and sell the vacant lot on a separate title for $500,000, while remaining in their original home. The original cost of $100,000 is divided on a reasonable basis, resulting in a capital gain of $450,000.
For adjacent land, the main residence exemption only applies if the same CGT event happens to both the land and the dwelling that is the owner’s main residence. As a result, Anusha and Previn’s capital gain on the vacant land when it is sold won’t qualify for the main residence exemption (although other less comprehensive exemptions may apply), making them liable for tax on any capital gain.
Downsizer contribution limitations
Since the vacant land has lost its association with Anusha and Previn’s main residence, they’re also ineligible to contribute any of the sale proceeds to superannuation as a “downsizer contribution”. Eligibility requires the contribution to be equal to part or all of sale proceeds from the sale of a dwelling.
Exploring alternatives
Anusha and Previn could ask their accountant to investigate other variations of subdivision and sale that would be more tax effective, other CGT concessions that may be available and alternative methods to contribute the proceeds to superannuation.
Tax advice is essential when developing retirement strategies. A qualified professional can help with:
Before proceeding with any subdivision plans, it’s crucial to seek expert advice to ensure you’re making informed decisions that align with your retirement goals and comply with current tax regulations.
Source: ATO - Real estate and main residence