It’s pretty common knowledge that your main residence is exempt from CGT. In straightforward cases, a property owned by individuals and used as a main residence throughout the period of ownership will receive a full exemption from CGT when the home is sold.
However, most are less aware of the various circumstances that can limit the application of the exemption. The rules surrounding the exemption are in fact quite complex and it pays to be aware and to plan accordingly.
For a lot of us in the Central West, our residence is on more than two hectares and that creates a different CGT story. If you own a property which is more than two hectares, then any part of the land more than the two hectares is subject to capital gains tax and cannot obtain a Principal Place of Residence exemption.
Farmers and large property owners should be aware that the two hectares main residence exemption covers:
● Your dwelling (and the land directly beneath it); and
● Adjacent land used primarily for private or domestic purposes in association with the dwelling.
This means a residential property (or a residential area of an income-producing farm) greater than two hectares will not be completely exempt from CGT.
So, How Do You Value It?
It would be so easy and reasonably logical to use a pro rata approach.
For example, you have a four-hectare property of which two hectares is exempt from CGT.
The land component might reasonably sell for $400,000 at the time you sold the property. When you originally purchased the site many years ago, the land component might have sold for $200,000, giving us a value for the taxable land of $100,000. You would be required to pay tax on the growth in value on the taxable land over the time you owned it.
Scenario 1 Amount
Valuation of taxable land at date of sale (50% of full land value) $200,000
Less Value of taxable land at date of original purchase (50%) ($100,000)
Capital Gain (Taxable value) $100,000
If you accepted this simplistic approach, you would pay too much tax!
One of the things about acreage is that usually the two hectares upon which the house sits is usually far more valuable than the undeveloped portion and when you sell you don’t have to apportion the value equally across the full acreage.
This means you can have a valuation done showing the value of the land holding the house and the value of the residual, unused hectares, and it’s likely that the unused amount will have a proportionately lesser value.
The taxable portion of your land is the bit that you can’t build on or is not suitable to build on. It is the part that gives you some space from the neighbours. And it is the part that has the least utility – it may be bush, rocky, steep or just somewhere to put a horse, or other farm animal.
It can be determined as a proportion of the value of the two hectares, including all buildings to the full sale price. This ratio will then be applied to the original purchase price and the difference will be the capital gain.
Scenario 2 Current Sale Original Purchase
Sale price incl buildings $700,000 $400,000
Valuation of 2 residential hectares $600,000
Ratio of exempt land 86% Applied 86% = $344,000
Less value of taxable land $100,000 $56,000
Capital Gain (Taxable value) $44,000
That’s a pretty big difference!
Do yourself a favour, have your taxable land valued by a competent valuer who has experience with CGT issues. The savings could be substantial.