Capital Gains on Inherited Property: What Beneficiaries Need to Know

December 7, 2023
capital gains on inherited property

Key takeaways:

  • Main Residence Exemption: In Australia, if the inherited property was the deceased’s primary residence and wasn’t used for income-producing purposes, it’s often exempt from Capital Gains Tax (CGT).
  • Two-Year Rule: Beneficiaries have a two-year grace period from the date of the deceased’s death to dispose of the inherited property without incurring CGT, provided the property was the main residence of the deceased up until their passing.
  • Professional Advice is Key: The intricacies of the Australian tax system, especially regarding CGT on inherited properties, make it vital to seek professional guidance.

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 estate, 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, often abbreviated as CGT, is a tax on the capital gain made from the sale of certain assets, such as properties. When you inherit property, it’s crucial to understand that the asset isn’t immediately subject to CGT.

“CGT is realized upon the eventual sale or disposition of that property.”

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.

Main Residence Exemption and Other CGT Reliefs

capital gains on inherited property main residence exemtpion

One of the primary exemptions from capital gains tax on inherited property is the main residence exemption. If the deceased used the property as their main residence and didn’t use it to produce income, the beneficiary might not need to pay any CGT upon selling it.

Moreover, properties that are sold within two years of the deceased’s death often fall under this exemption.

However, there are specific circumstances to consider. If the deceased was using a part of their home to produce income, like renting out a section, only a part of the property might be exempt.

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.

Unlike the family home, an investment property used to generate rental income may not fully enjoy the same CGT exemptions.

An inherited property that was considered an investment by the deceased will likely have different tax implications.

For such properties, understanding the original purchase price, the accumulated expenses (like renovations), and the property’s value upon inheritance is crucial. This data can influence the eventual CGT when you decide to sell the inherited property.

Transfer a property without paying stamp duty is another essential aspect to consider when dealing with inherited assets.

How do I avoid paying 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 for a longer period of time. The longer you hold the property, the lower the capital gains tax rate will be.
  • Make improvements to the property. The cost of improvements to the property can be deducted from the capital gains tax liability.
  • Claim a capital gains tax exemption. 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

capital gains on inherited property 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.

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.

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