If you inherit a dwelling, there are usually no capital gains tax implications at the time you inherit it. However, it is important to know that capital gains tax may apply when you subsequently sell, or otherwise dispose of, the dwelling. We’ll take you through the key points to understand when it comes to capital gains tax on inherited property.
How can CGT affect your inherited property?
The capital gains tax implications on an inherited property, including exemption or liability, depends on a number of factors. Details such as when the former owner died, when they (and subsequently you) acquired the dwelling, and what they (and you) did with it.
Exemption from Capital Gains Tax on Inherited Property
Under certain conditions, if you inherit a property and later sell or otherwise dispose of it, you may be exempt from capital gains tax (CGT).
The same exemption applies if you are the trustee of a deceased estate.
Importantly, the inherited property must include a dwelling and you must sell them together. You cannot get a CGT exemption for land or a structure that you sell separately from the dwelling.
There are also different rules that apply in the situation where you have acquired a share of a property on the death of a joint tenant.
If you are a foreign resident, or the deceased was a foreign resident, you are generally not entitled to the main residence exemption when you sell the property. However, under certain circumstances, you may be entitled to. You can find some more detail on this below.
Eligibility for CGT Exemption on Inherited Property
There are a number of factors to be considered when determining eligibility for an exemption from capitals gains tax on inherited property when it is sold or disposed of. It is not always as simple as meeting a few pieces of set criteria and that is why it is strongly recommended to seek advice from CGT experts such as the team of tax accountants and tax lawyers at The Quinn Group. Professional advice can help ensure that you are correctly claiming any exemption that you might be entitled to. In the event that you are eligible to pay CGT on your inherited property, we can work with you to legally minimise any capital gains tax payment obligations. Contact us by calling (02) 9223 9166 or submit an online enquiry to make an appointment.
Some of the factors to be considered by the ATO when it comes to assessing eligibility for a CGT exemption on property inherited from a deceased estate include, whether:
- the deceased person acquired the property before or after 20 September 1985
- it was the deceased person’s main residence immediately before they died, and wasn’t being used to produce income at the time
- the deceased person was an excluded foreign resident at the time of death
- you were an Australian resident when you inherited the property
- it was your main residence, or
- the main residence of anyone with the right to occupy it under the will
- the main residence of the spouse of the deceased person immediately before their death
- wasn’t used to produce income
- you dispose of an inherited property within 2 years of the person’s death and either
- the deceased acquired the property before 20 September 1985
- this exemption applies whether or not you used the dwelling as your main residence or to produce income during the 2 year period
- the deceased acquired the property on or after 20 September 1985
- the dwelling passed to you after 20 August 1996, and it was the deceased person’s main residence and not being used to produce income just before the date they died.
- the deceased acquired the property before 20 September 1985
It is definitely not straightforward!
There are some other important points to remember in relation to capital gains tax on inherited property. For example, land or a structure that you may sell separately from the dwelling are usually subject to capital gains tax and different conditions apply when you have acquired a share of a property on the death of a joint tenant.
Foreign Residents and CGT on Inherited Property
The law for foreign residents changed on 12 December 2019. This may affect your entitlement to claim the main residence exemption on an Australian residential property you inherit from a foreign resident.
When you inherit Australian residential property:
- 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.
If you are not entitled to the main residence exemption, CGT will apply when you sell or dispose of the property.
Determining the Cost of the CGT Asset
Unless the asset you inherit is fully exempt, you will need to know its cost base to work out your CGT when you come to sell or dispose of it. Depending on the circumstances, the cost base may be based on the value of the asset:
- when the deceased acquired it, or
- when they died.
The acquisition cost of the property is the market value of the property at the date of death, if any of the following apply:
- the property was acquired by the deceased before 20 September 1985
- the property was passed to you after 20 August 1996 (but not as a joint tenant), and
- it was the deceased person’s main residence just before they died
- it wasn’t used to produce income
- the dwelling was passed to you as the trustee of a special disability trust.
In all other circumstances, your acquisition cost is the deceased’s cost base on the day they died.
This means:
- the deceased’s original purchase price, and
- any other costs incurred then and afterwards (by the deceased) – for example, legal fees on that purchase and any capital improvements.
Keeping Records of Inherited Assets
When you inherit an asset, it is important to keep records of:
- when the asset was acquired by the deceased
- the asset’s value or cost
- costs related to the asset that are incurred by you and the legal personal representative of the deceased estate.
These records will help you work out your potential CGT liability, or eligibility for exemption, when you later come to sell or dispose of the asset.
If the deceased acquired an asset before 20 September 1985, you will need to know the asset’s market value at the date they died.
- If the legal personal representative has had the asset valued, ask for a copy of the valuation report.
- If not, get your own valuation.
The team at The Quinn Group can assist with arranging a historical valuation for the inherited property.
If the deceased acquired an asset on or after 20 September 1985, you will need records of the deceased’s cost base for the asset.
You are required to keep records for at least 5 years after the CGT event occurred.
Get Professional Capital Gains Tax Help
As you can see, there are a lot of complex factors to be considered when assessing liability for capital gains tax on inherited property.
If you have inherited a property, it is important to seek advice from CGT experts such as the team of tax accountants at The Quinn Group. Professional advice can help to ensure that you are correctly claiming any exemption that you might be entitled to. And in the event that you are eligible to pay capital gains tax on an inherited property, we can work with you to legally minimise any CGT payment obligations. Contact us by calling (02) 9223 9166 or submit an online enquiry to make an appointment to discuss the CGT implications for your inherited property.
