Your Bright-line questions answered
Despite the real estate market cooling in recent weeks the extent that property prices have gone up has been unprecedented. This has led to a shortage of available houses and available sections. Let’s face it, urban land… they aren’t making any more of it.
This has led to an opportunity for some people to look at sub-dividing a section or even sections from their properties. And why not. With councils reducing the minimum size requirements for a domestic section for many areas to around the 300 square metre mark, if you have a section of 700 square metres or more, subdivision may be possible depending on how your house is orientated on the section (in some instances homeowners have moved their houses on their section to make subdivision possible).
Doing so, many free up equity for other purposes such as paying down a mortgage or for investment purposes. In lots of areas, sections of any size are going for $300,000 or more.
So, what are the in’s and outs’?
For owner occupied housing the Brightline Test is not applicable as this does not apply to a taxpayers primary residential dwelling. It does apply to residential rentals and other secondary dwellings such as holiday homes and baches where any gains on sale are taxable if the property was purchased on or after 27th March 2021 and sold within 10 years of purchase.
Brightline is effectively a capital gains tax. Assuming that we are dealing with a residential home that has been lived in by the owner for the entire period of ownership there would be no brightline implications. If in doubt, Auctus is here to help
How does subdivision of sections change things?
The subdivided sections are treated as being owned from the date when the original house and section (or section if a house was subsequently built on a bare section) was purchased. This is regardless of when the new title is issued.
- If the subdivision was work of a minor nature? If the subdivision was purely dividing the section into two sections and no additional work was done apart from erecting a new fence, then this would be hard to argue that this is no more than minor. When the work is more than minor in nature then it begins to fall under being a development which has a different set of rules to be applied. For example, if the section was subdivided and then a new house was built on it and then sold.
- What was the primary use of the new section prior to the subdivision? Where the section was predominantly (over 50%) used for domestic purposes in connection to the ownership of the home then the section is deemed to be part of the dwelling and curtilage. If these are the basic facts as outlined where a back section of an owner-occupied property (which has been used with the house for domestic purposes) is sold and the subdivision is of a minor nature, the home owner will be able to bank the capital gain on sale of the section net of the subdivision costs tax free.
If there are other factors at play then differing rules may apply, if the property has been used as a rental or a home business workshop is on site or the property is a lifestyle block… Care also needs to be taken if you are regularly buying and selling houses, this is not one size fits all.