Inherited Property and Capital Gains Tax

Inherited Property and Capital Gains Tax

Inherited Property and Capital Gains Tax

A capital asset that is inherited through an estate is deemed to be acquired on the day of a person’s death. Capital gains tax (CGT) is generally not due when you inherit the property. Unless an exemption applies, CGT will be due when you sell or otherwise dispose of the property in the future. This article will examine the general application of CGT on inherited assets.

Whether CGT applies will be determined by:

Date of acquisition

If the deceased person acquired the property before 20 September 1985 or after.

Main residence property

If the property was the deceased person’s main residence immediately before they died and it was not used to produce income at the time.

Foreign residency status of deceased person

If the deceased person was an excluded foreign resident at the time of death.

Australian residency of beneficiary

If the person inheriting the property was an Australian resident when they inherited the property.

Main residence of beneficiary

If it was the main residence of the person inheriting the property, or:

  • the main residence of any beneficiary with the right to inherit it under the will.
  • the main residence of the spouse of the of the deceased person immediately before their death.
  • it was not used to produce income.

2 year rule

Within two years of the passing of the deceased person, you dispose of an inherited property and either

  • the property was acquired by the deceased before 20 September 1985 (this exemption is applicable regardless of whether you used the property for income producing purposes or as your main residence throughout the 2 period).
  • the property was acquired by the deceased on or after the 2 year period.
  • the property passed to you after 20 August 1996, and it was the deceased person’s main residence and not used to produce income just before the date they died.

Note: There are extensions to the 2 year period.  The 2 year limit will be extended if disposal of the property is delayed by ‘exceptional circumstances’ outside your control. In some cases, safe harbour allows for an additional 18 month extension to be added to the 2 year limit.

Capital Improvements

The property is exempt from CGT upon sale if the deceased passed away prior to 20 September 1985 (it is a pre-CGT asset). However, if major capital improvements were made to the property the improvements are classified as a separate asset and may be subject to CGT.

This may mean that the property is partially exempt. You may need to work out the proportion that is exempt.

Value of the property

The acquisition cost of the property is determined by the market value at the date of death, if any of the following applies:

  • the deceased acquired the property prior to 20 September 1985
  • the property was passed to the relevant beneficiary after 20 August 1996 (though not as a joint tenant) and it was not used to produce income and it was the deceased person’s main residence just before they passed away.
  • The property was passed to the relevant beneficiary as a trustee of a special disability trust.

If any of the below applies, your acquisition cost of the property will be the deceased persons cost base on the day they died. Meaning:

  • The deceased person’s original purchase price; and
  • All other capital costs incurred to purchase the property, such as legal fees or any capital improvements.

It may be necessary to contact the deceased’s accountant or tax advisor to obtain these details.

Tenants in common or joint tenants

You must determine whether the property was owned as ‘tenants in common’ or as ‘joint tenants’.

Tenants in common

Tenants in common ownership is when 2 or more people own a certain percentage in the property. This can be an equal or unequal percentage.

When a tenant in common dies, their share of the property forms part of their estate. This means that the property can be passed to a beneficiary of the estate (only) or can be sold by the personal legal representative of the estate.

A tenant in common has the right to lease, mortgage or sell their share of the property. This can be done without the approval of other tenants. The percentage of the ownership is what will go to the beneficiary. For example, if the deceased person owned 80% of the property. The relevant beneficiary will then inherit that 80% share.  Any CGT exposure is in line with the ownership percentage interest.

Joint tenants

Under joint tenant ownership, the joint tenants own equal shares in the property. As a result, each person will have an equal share of any capital gain or loss from a CGT event is equal.

For CGT purposes when one joint tenant dies, the share of the deceased person in the asset is deemed to be acquired in equal shares by the surviving joint tenants.

It is the date of death that the interest is taken to pass in equal share to the surviving joint tenant as if their interest is an asset of the estate and the surviving tenant is the relevant beneficiary.

In a joint ownership structure, if the property was the deceased person’s main residence, the surviving joint tenant may be eligible for the main residence exemption for the share of the property that they have acquired from the joint tenant who has passed.

Property inherited as a foreign resident

For foreign residents, the law changed on 12 December 2019. You cannot claim the main residence exemption when you inherit Australian residential property under the following circumstances:

  • if the former owner of the property was a foreign resident for more than 6 years at the time of their death, you cannot claim the main residence exemption for the period they owned it.
  • if you have been a foreign resident for more than 6 years when you sell or dispose of the property, you cannot claim the main residence exemption for the period you owned it.
  • if you have been a foreign resident for 6 years or less when you sell or dispose of the property, to claim the main residence exemption you must satisfy the life events test.

Inheriting property that was inherited by the deceased

If the property you inherited is property that was inherited by the deceased and was acquired by them on or before 20 September 1985 as a trustee or beneficiary of an estate, a partial main residence exemption may apply. The amount that is exempt is calculated by the number of days the property was the beneficiary’s main residence and your main residence.

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Selling inherited properties can have complex capital gains tax implications. To make sure you are accurately claiming any exemptions to which you may be entitled, you should seek professional legal advice.

Get help and contact us today!

Sydney City Legal Practice can provide you with tailored advice suitable to your needs with respect to inherited assets and CGT application. Contact us today for a free consultation on 0437 822 808 or submit an online enquiry here.

Author: Carolina Reveco, Principal of Sydney City Legal Practice

This article is to serve as a general information source only. This publication contains opinions, examples, words, and extracts from legislation and other sources; it should not be used as a source of legal, financial or tax advice. To obtain personalised legal advice tailored to your needs that can be relied upon, please reach out and speak to our legal team.