By Brendon Yuen & Kim Reynolds
Most Australians are aware that their home (or main residence) is generally exempt from capital gains tax (CGT) should they decide to sell and relocate. Most are also aware that the sale of an investment property, whether it be commercial or residential, may be subject to capital gains tax (CGT). But are you liable for CGT on the sale of an inherited residential property?
When selling an inherited house, unit, flat or other dwelling, there are certain provisions that mean you, as the new owner, may not be liable for CGT. Wide-ranging scenarios and circumstances need to be considered to determine whether CGT may apply to an inherited property. Some of these are set out below.
Where inherited property was acquired by the deceased before 20 September 1985 the beneficiary is taken to have inherited the property at market value as at the date of death of the deceased. However, a capital gain upon the sale of the dwelling may be fully exempt from any liability if certain conditions are met, including conditions under the will.
Where those conditions are not met and the beneficiary decides to sell the property after the two years since the date of death, CGT will be assessed based on the increase of the property value from the date of death to the date of sale.
Extension of the ‘Two-year window’
For inherited property that was acquired by the deceased after 20 September 1985, there is a two-year window (specifically from the date of death and not the property transfer date) to sell the property before it would be assessable for CGT. Should the beneficiary decide to rent out the residence to tenants during the two-year window, the exemption is maintained.
If the beneficiary decides to occupy the inherited property as their main residence during the two-year period after the deceased’s date of death, the property can continue to be exempt from CGT liability for the period it is occupied.
Please keep in mind the ATO do have discretion to extend the two year window where certain “safe harbor” conditions are satisfied, for example where the sale is delayed due to circumstances outside of the beneficiary’s control.
Where a joint tenant (often a spouse) of the property dies, often the surviving spouse will continue to reside in the property. In these circumstances, the main residence exemption status continues for the surviving spouse.
If the property was acquired on or after 20 September 1985, the beneficiary can still be exempt from CGT in the two-year period if:
- The property was the deceased person’s main residence at the date of death; and
- The property was not used to produce assessable income at the date of death.
In the event the beneficiary exceeds the two-year limit (and is unable to satisfy the conditions for an extension of this time period) to sell the property, it may not mean the entire gain on the property will be subject to CGT, a partial exemption may still apply, depending on individual circumstances.
Inheriting estate properties is often a complex and confusing area and great care should be exercised when applying the rules as individual circumstances can vary and can impact significantly on the outcome.
If you are the executor or beneficiary of a deceased estate and need assistance in understanding the tax consequences, including those related to how to deal with property that was owned by the deceased, please get in touch, we welcome the opportunity to discuss your specific situation and outcome requirements.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.