When dealing with capital gains on inherited property, many individuals get confused about regulations and tax implications.
After all, inheriting property, whether it’s a treasured family home or a lucrative investment property, doesn’t just come with sentimental value—it also comes with financial implications.
In this article, we’ll explain everything you need to know about capital gains tax (CGT) and explore how it applies to properties bequeathed by deceased loved ones.
Whether you’re a beneficiary awaiting a transfer or someone planning for the future, understanding the tax implications on inherited assets is paramount.
Understanding Capital Gains Tax (CGT) on Inherited Property
Capital Gains Tax (CGT) is a tax on the profit you make when you sell an asset, including inherited property. However, not all inherited properties are immediately subject to CGT. Here’s a simplified overview of the process:
- CGT is triggered: when you sell the inherited property, not when you inherit it.
- Exemptions and reliefs: may apply, depending on various factors like the property’s usage and the date of acquisition.
Table 1: Key Dates and CGT Implications
| Key Date | CGT Implication |
|---|---|
| Before 20 September 1985 | Property may be exempt from CGT |
| After 20 September 1985 | Market value at the time of the deceased’s death used for CGT calculation |
| Within Two Years of Death | Possible exemption if the property was the deceased’s main residence |
There are different factors that influence whether and how much CGT one might owe. For instance, the date when the deceased acquired the property plays a pivotal role, especially if it was before 20 September 1985.
This is a significant date in tax law as properties bought before this date may be exempt from CGT.
Key Factors Influencing CGT on Inherited Property
- Date of Acquisition: Properties acquired by the deceased before 20 September 1985 may be exempt from CGT.
- Main Residence Exemption: If the deceased used the property as their main residence and did not rent it out, it might be exempt from CGT when you sell it within two years of their death.
- Investment Properties: Inherited properties used as investments have different rules and may not be fully exempt from CGT.
Table 2: Main Residence Exemption Conditions
| Condition | CGT Implication |
|---|---|
| Property was the deceased’s main residence | May be exempt from CGT if sold within two years of death |
| Property was partially rented | Only the portion used as the main residence may be exempt from CGT |
Calculating Capital Gains Tax
When calculating the capital gains tax on an inherited property, you need to determine the base cost. For properties acquired after 20 September 1985, the base cost is typically the market value at the time of the deceased’s death. Any improvements made to the property can also adjust the base cost.
Partial Exemption
In some cases, inherited properties may qualify for a partial exemption from CGT. For instance, if the property was partially used as the deceased’s main residence, only the portion that was used to generate income might be subject to CGT.
Main Residence Exemption and Other CGT Reliefs
One of the primary exemptions for inherited properties is the main residence exemption. This applies if the property was the deceased’s primary home and was not used to generate income. Here are the specifics:
- Main Residence: If sold within two years of the deceased’s death, it may be exempt from CGT.
- Partial Exemption: If the property was partially rented, only the portion used as the main residence might be exempt.
- Capital Improvements: Major improvements made after 20 September 1985 can affect CGT calculations.
Table 3: Common Tax Deductions for Inherited Investment Properties
| Expense Type | Deductible From CGT |
|---|---|
| Mortgage Interest | Yes |
| Maintenance Costs | Yes |
| Property Management Fees | Yes |
| Legal Fees for Improvements | Yes |
Another aspect to consider is if the property underwent major capital improvements after 20 September 1985 but before the date of death. Such improvements might impact the CGT assessment.
Foreign residents and inherited property
According to the ATO, if you inherit a residential property in Australia and the previous owner was a foreign resident for over six years at the time of their passing, you are ineligible to claim the main residence exemption for the duration of their ownership.
Inherited Investment Property vs. Personal Residence
While the main residence exemption offers relief for properties that were used as a primary dwelling by the deceased, things become a tad more intricate when you’re dealing with inherited investment properties.
The tax implications differ significantly between inheriting a family home and an investment property:
- Family Home: Often enjoys main residence exemption.
- Investment Property: Requires careful consideration of the original purchase price, improvements, and market value at the time of inheritance to determine CGT.
Transfer a property without paying stamp duty is another essential aspect to consider when dealing with inherited assets.
How to Reduce Capital Gains Tax on an Inherited Property
There are a number of ways to reduce capital gains tax on property in Australia, including:
- Hold the Property: The longer you hold the property, the lower the capital gains tax rate will be.
- Make Improvements: The cost of improvements to the property can be deducted from the capital gains tax liability.
- Claim Exemptions: There are a number of capital gains tax exemptions available, such as the main residence exemption and the small business capital gains tax exemption
Determining the Base Cost for CGT Calculation
When calculating the capital gains tax on an inherited property, understanding the base cost is paramount. For properties inherited from a deceased who acquired the asset after 20 September 1985, the base cost is typically the market value of the property at the time of the deceased’s death.
“If the property was bought before this date, different tax rules might apply, making it essential to consult tax experts or legal professionals in such instances.”
It’s also worth noting that any expenses, like legal fees or costs of home improvements undertaken by the deceased, can adjust the base cost. Such considerations can significantly influence the amount of CGT payable when selling the inherited asset.
Selling the Inherited Property: What to Expect
When you decide to sell an inherited property, the difference between the sale price and the base cost (as determined above) results in either a capital gain or loss.
If it’s a gain and the property is not fully exempt from CGT, you’ll need to pay the tax. Remember, the tax rate applied is not a flat rate but is often aligned with your marginal tax rate.
Also, timing can influence your CGT obligations. Selling the property within two years of the deceased’s death might allow for CGT exemptions, especially if the property was the main residence of the deceased.
However, there are always exceptions, and understanding these intricacies can aid in making informed decisions.
If the inherited property was transferred from a spouse in Victoria, it’s essential to understand regional nuances and exemptions in CGT calculations.
Property Maintenance and Tax Deductions
For those who decide not to sell the inherited property immediately, certain costs associated with maintaining the property can be claimed as tax deductions, especially if it’s an investment property generating rental income.
These deductions can range from mortgage interest, maintenance costs, property management fees, and more. Keeping a detailed record of these expenses can be beneficial for future CGT calculations.
Deep dive: Need to transfer your property and unsure of how it all works? Read our detailed guide on how to transfer property to a family member to get all your questions answered.
Tax Planning and Professional Advice
Tax Planning
Engaging in strategic tax planning can help minimize your capital gains tax implications. It’s advisable to consult with a tax professional to explore various tax planning strategies tailored to your specific situation.
Proper tax planning can provide significant tax savings and ensure compliance with Australian tax laws.
Seek Professional Advice
Given the complexities of capital gains tax on inherited property, seeking professional advice is crucial. A tax advisor or legal professional can offer guidance on how to navigate the intricacies of the tax system, identify potential exemptions, and assist with filing accurate tax returns.
Conclusion
This article aims to provide clarity on capital gains tax implications for inherited properties, helping you navigate this complex area with confidence. For more detailed advice, consult with tax professionals or legal experts.
Should you find any discrepancies or feel there’s crucial information missing, please do not hesitate to inform us. We value accuracy and are always open to constructive feedback
FAQ about Capital gains on inherited property
Is inheritance from overseas taxed in Australia?
No, inheritance from overseas is not taxed in Australia. However, you may have to pay capital gains tax if you sell the inherited asset.
Is there capital gains tax on inheritance property in Australia?
Yes, there is capital gains tax on inheritance property in Australia. Capital gains tax is a tax on the profit you make when you sell an asset.
How to calculate capital gains tax on property in Australia?
To calculate capital gains tax on property in Australia, you need to subtract the cost base of the property from the sale price of the property. The cost base of the property is the amount you paid for the property, plus any other costs associated with the purchase, such as stamp duty and legal fees.
What is the 2 year rule for CGT inherited property?
A property that you inherit is exempt from Capital Gains Tax (CGT) if you sell it within two years following the death of the deceased, provided that either of the following conditions is met: the deceased had acquired the property before September 1985.
How long do you need to live in a house to avoid capital gains tax Australia?
If you live in a house for 12 months or more, you may be eligible for the main residence exemption. The main residence exemption means that you do not have to pay capital gains tax on the sale of your main residence.
What is the capital gain exemption?
The capital gain exemption is a tax exemption that applies to the sale of certain assets, such as your main residence and small business assets. The capital gain exemption can help to reduce your capital gains tax liability.
