Can you? Yes. Should you? That's a whole different question that requires you to make a bunch of assumptions and projections.
1) If you treat Property A as your main residence until sale, then for the period between acquiring the land for Property B and selling property A, Property B is subject to CGT. Your main choices are to keep treating Property A as your main residence until a) you buy the land for property B or any point up until you sell property A (assuming that you bought the land for property B less than 4 years before you moved in).
2) You therefore should do some modelling to work out which property you think will give rise to the largest capital gain over time for the periods where you could make a choice about your main residence.
3) In that regard, you would be best considering
- The possibility that on May 12th the budget announcements roll back the 50% CGT discount. At the moment there is no knowledge of whether the old rules will continue to apply to property owned before then but if the announcement repeals or reduces the discount for all sales after May 12th, then you may want to treat Property B as your main residence for that period, even though it exposes you to CGT on property A, to ensure that property B is subject to less or no CGT. Fortunately, you will know by the time you lodge your tax return for this year what the announcements say.
- What your expected tax rate will be when you sell Property B. If this is your forever home and you might be retired by then - then maybe paying no CGT now and some CGT a long time down the track is a good thing. But if you will sell property B soon, and you are early in your career now, so on a low tax rate, but will be on a high tax rate later, esp when taking the gain into account, then maybe its better to take the CGT hit now.
- I would say it's worth speaking with someone who can model this for you.
4) Some people rely on "no-one will know when I sell property B that its subject to CGT as I will have been living in it for so long so I can just choose to treat that as my main residence too". Don't count on that! Data matching and other data tracking makes that an unreliable assumption.
5) If you elect to treat property A as your main residence for the full period, keep REALLY good records of all costs involved with property B, including loan costs, construction costs, rates, insurance etc.. for all periods until you sell property A, as those can be added to your cost base before sale.
6) in modelling where you gain is best placed, remember that the cost base of property A is reset when you first started renting it out, so the gain will be the increase in value since that time. But for property B, the gain will be calculated as the difference between the projected sale, and the construction cost, land cost and associated costs, apportioned between the periods it was your main residence and the periods it was not.
Thank you for this in-depth reply and various scenario's for us to consider.
Selling Property A will be life-changing for us, as if there is no CGT on the sale proceeds due to the 6 year rule, the expected profit from the sale will essentially make us mortgage-free in our early 30's. This opens up an entirely new chapter for us, and a world of possibilities re: massively increased cash flow, investing in a diverse shares portfolio, retiring early & contributing max. concessional amounts to boost our superranuation.
Fortunately for us, Property B is our dream home, in our dream location, nearby both our families and on a great sized acreage for us and our young family. For all intents and purposes - this IS our forever home and we intend to live here until our infant children have grown up and moved out, and well beyond that / into retirement. We have absolutely no plans to sell or move on from this home, unless it was to house swap or rent out, and travel the world whilst someone lived here to take care of it for us.
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