If you’ve decided to knock down your home and build a couple of townhouses—perhaps to live in one or sell them all—it’s important to understand the tax implications. The same applies if you’re planning to subdivide your large backyard, or if you’ve purchased a large block of land (such as a coastal or country property) with the intention of building and selling homes because the market has picked up.
Even if you’ve managed projects professionally before, property development can raise complex tax issues.
Income Tax: Business or Capital Gain?
In many of these cases, the ATO may treat your activity as small-scale property development. That means any profit you make could be taxed as ordinary business income, not as a capital gain, which is usually taxed at a lower rate. This can apply even if it’s a one-off project.
If the land was originally held as a capital asset (e.g. your home or holiday block), and you later use it in a development project, then capital gains tax (CGT) may apply up to the point you change its use—unless the land was your main residence and qualified for the CGT exemption.
Deductible Costs
One potential benefit of being treated as a business is that you may be able to deduct your expenses each year, including interest on loans used to fund the development.
Selling Part of Your Backyard
If you're simply subdividing your backyard and selling a portion, this is usually treated as a capital gain, not business income. However, you can’t claim the CGT exemption for the part you sell—even if the land is part of your home.
Knockdown and Rebuild
If you knock down your home and rebuild, then move back in and make it your main residence within the required timeframe, there are generally no CGT issues. However, the ATO may review these types of arrangements more closely in the future.
GST Considerations
GST usually doesn’t apply to small, one-off property projects. But if you’re subdividing and selling multiple lots, you might be seen as running a business—and that could make you liable for GST.
The rules around GST and property development are complex, and outcomes depend on your exact situation.
Final Thoughts
The tax treatment of small-scale property development can vary greatly depending on your specific circumstances. To avoid surprises, it’s important to seek professional advice before you start—or even if you’ve already begun. We’re here to help you get it right.
