Claiming on subdivision of family home

Question from Mingo updated on 22nd February 2011:

My wife and I are in partnership and have lived in the same property for 13 years. We built and moved to a 2nd house at the back of this property in 10/2009. Mortgage was borrowed against the old house which has been rented out since 01/2010. We spent around $7,000 to refurbish the rental house soon after we moved to the 2nd house while the subdivision was still in process. We have not yet filed rental income for the year end 31/03/2010. Q1. Can we claim expenses incurred before subdivision took place? My salary is at a low $60,000 and my wife is a housewife. Our loan is around $300,000. We are paying interest only and receiving rental $485 pw before deducting rental management fees. Q2.We are looking for a 2nd opinion regarding the set up of LAQC instead of a partnership. We are planning to set up a Family Trust for the house we live in once the separate title comes through. For the rental property we have been advised to set up LAQC in order to get a better tax benefit. What is your advice about this?

Our expert Mark Withers responded:

You will be able to claim expenses associated with deriving the rental income from the point where the dwelling was made available for rent. The $7000 refurbishment costs are probably non deductible personal costs though as they were associated with the period where you lived in the house. None of the interest on money borrowed to build the new dwelling for yourselves will be deductible against the rental income from the original house. This may be why your advisor has suggested a restructure.

Section CB12 potentially taxes gains made where property has been developed and divided within 10 years of acquisition. There are exemptions for your own home and exemptions where you intend living in the new home and it would seem you owned the property 10 years before thiis development and subdivision but I would recommend a review of the facts before you confirm a profit by selling the dwelling to a LAQC. Remember also that the QC rules are being completely overhauled and the final detail associated with this is not yet available. 

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.


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