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Subject: Capital gains tax - sale of adjacent land in separate transaction
Question:
Will capital gains be payable when you sell land to your neighbour?
Answer:
Yes.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts:
You purchased a property after 19 September 1985 with a sale price of an amount.
The property is less than 2 hectares.
You will sell a portion of your land to your neighbour and you will receive an amount.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-120.
Income Tax Assessment Act 1997 Section 118-130.
Income Tax Assessment Act 1997 Section 118-165.
Reasons for decision:
As a general rule any capital gain (or loss) from the disposal of a dwelling is ignored for capital gains tax (CGT) purposes if the taxpayer is an individual and the dwelling was the taxpayer's main residence throughout their entire ownership period.
The exemption is extended to any land that is adjacent to the dwelling to the extent to which it is used for private or domestic purposes in association with the dwelling and does not, together with the land on which the dwelling is situated, exceed two hectares in area.
However, if any part of the adjacent land is disposed of separately from the dwelling then the main residence exemption does not apply to the disposal. That is, the disposal of the land is only exempt from CGT when it is sold with the dwelling.
When adjacent land is sold separately, the cost base of this block of land for CGT purposes is a proportionate share of the cost base of the original asset. In your situation, the original cost for the whole property would need to be apportioned between the block of land and the house.
In your case, the capital gain or capital loss will be the difference between the proceeds that you receive and the proportion of the original cost that relates to the land sold. The capital gain or capital loss is not disregarded as you did not sell the dwelling with the land.