Do I have to pay capital gains tax on land I haven't owned for a year? Ask Margaret

Hi Margaret,

We bought 1.33 acres of land in a subdivision on at the end of last year with the hopes of building a home on it in 2014. Since we bought the land my husband was in a pretty bad work accident and our plans to build a home have changed.

We would like to put the land up for sale now but have questions on the capital gains that we may owe since we have not owned it for a year yet. We paid $35,000 and are not looking to make a profit on it when we sell.

Help!

Shawn

When you buy any property as an investment, it immediately begins attracting capital gains tax (CGT).  CGT applies to all property you own, regardless of whether you intend for it to make a profit for you (as in a pure investment) or whether you think you might use it at some time in the future for yourself.

Your own home, or principal place of residence, is exempt from CGT, but you can only claim one property at any one time for that exemption. It must also be a property which is your bona fide principal place of residence (unless you are invoking the six year rule which allows you to move out of a principal place of residence for up to six years). 

The rate of tax is determined by how long you held the asset for – in the case of property, you get a 50% discount if it is over 12 months and you pay full tax (according to your own marginal rate of income tax) for any asset held less than that period of time.

In your case you purchased this acreage for the purposes of building your own home, but at no time has it been your principal place of residence and so you may have a CGT liability, at the full rate, if the contract for sale is signed within 12 months of you signing your own contract when you purchased.

However if, as you say, you do not intend to make a profit, you may instead have a capital loss. This is because your cost base (that is the starting value) is the purchase price plus costs to buy, and your ‘proceeds’ figure is the sale price less any cost to sell. In addition, the interest on any loan you had to hold this land, plus any costs you incurred while you held it (such as rates), add to the cost base, effectively reducing the difference even further!  

This difference becomes the gain, or loss.  If you sell for a similar price to that which you paid, once you account for all of the costs I mentioned, you will be more than likely to have a loss and there will be no tax.  However there will be no tax deduction either, as this loss can only be carried forward indefinitely to be written off against any future capital gain you may make from other investments.

You should be sure to get some good guidance from an accountant around what you can and cannot claim prior to making the sale.

Regards,

Margaret

She is the founder of Destiny.

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