Are you in the process of purchasing a piece of land with someone and have the intention of developing the land and subdividing it? Well, here’s what you need to know to avoid an unnecessary tax along the way.
Partition Arrangements – what are they?
A partition Arrangement is a legal document that outlines the terms and conditions for the division of property or land between multiple parties.
When partition arrangements are used it is necessary to confirm when any change of ownership is taken to occur from a legal perspective and when relevant contracts are entered into as this would influence the tax treatment.
2 friends acquired some land for $700,000 as tenants in common in equal shares in 2022. No partition agreement was in place when the land was acquired. They now plan to subdivide the land into two equal lots and arrange for:
The market value of the land is currently $900,000.
Because there was no partition agreement in place, it has created a taxing point when the land is subdivided, and ownership divided between the lots.
This creates a taxable gross gain for each person of $50,000, being $100,000 in Market value increase for each person (50% of the total increase in Market value) multiplied by 50% of the ownership for each person in each respective lot.
Now, let’s assume the facts are the same as the above, but there was a partition arrangement in place before the land was purchased. Depending on how it is worded, the arrangement will generally provide capital gains tax relief when the interest in the divided lots are transferred between the friends
Good legal and tax advise is needed as early as possible to ensure this is the case.
Learn why a Partition Arrangement is crucial when buying land for subdivision to avoid unnecessary tax implications. Get expert advice from WLM Financial for smooth navigation.
If you would like assistance with navigating the tax and accounting challenges facing businesses and individuals reach out to WLM today.
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