VIDEO: Selling Your Principal Place of Residence to a Developer

With increasing density and land developments in Sydney, some people are fortunate enough to have their properties rezoned from their existing residential living zonings to a much higher density zone that attracts the interest of developers.

While this creates huge opportunities, owners should also consider the tax implications of selling their property to a developer.  For instance, if the sale of a principal place of residence is classified as an “ordinary sale” it should not attract profit tax.  Sales of land or residences deemed to be profit transactions will attract a significant tax liability.

Let’s consider some examples.

If a principal place of residence, on up to 5 acres of land, has always been used as your principal place of residence it can be classed as an ordinary sale to anyone, including someone who may consider redeveloping the land, as long as the contract is prepared properly.  

There can be nothing in the contract that will give rise to classifying the seller as a developer, or classifying the transaction as a transaction for profit.  It should simply be realising the sale of your principal place of residence or the sale of a capital item.

An ordinary sale should not attract profit tax, but again careful consideration must be given to ensure this does not occur.

If a person lives on five acres of land that has been rezoned residential and wants to sell the land to a developer, while still retaining their home or principal place of residence, this transaction is fraught with danger.

In this instance, unless the contract is prepared correctly, the residue land sold to the developer may be classified as a sale of land rather than the sale of a principal place of residence and will attract additional tax.

In such circumstances, it can be better to sell the whole 5 acres to the developer and look to buy a principal place of residence somewhere else,  or sell the whole 5 acres and then enter into a contract to buy back the principal place of residence. While this would usually involve the payment of stamp duty to buy back the residence, under normal circumstances it will avoid the tax on the sale to the developer as long as the contract is properly prepared.

If you wish to sell the whole 5 acres and purchase the house back, you should ensure that the full purchase price is paid at the time of the sale, and then a subsequent payment to purchase the principal place of residence is made at the time of the repurchase.  This means that if anything was to happen between the sale of the land and the purchase of the residence you are legally protected and would have access to proper compensation.

It is also worth noting that the New South Wales government is currently considering whether there should be a tax on land that is rezoned, and a payment made to the government for a component of the financial gain received by the seller.  Again, careful consideration should be given to the possibility of this tax being introduced in the future before you enter into any transactions.

While selling your principal place of residence to a developer does, in most circumstances, result in a large financial uplift, you must ensure that the transaction is prepared and implemented correctly to avoid any tax consequences.

The key is to seek professional advice from an accountant and an experienced property lawyer to ensure you understand, and avoid, all of the possible pitfalls.

If you require any further information on sales of this nature please do not hesitate to contact Maclarens on 9682 3777.