Tax Q&A: Inherited Property


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Inherited Property

Q: My two siblings and I jointly inherited our family home about 15 months ago, when our father passed away. It is a semi-detached home located in a quiet street in the eastern suburbs of Sydney, and is valued at $1.7m. Although in good,  solid condition, it looks a bit dated. 


Since that time, the property has been sitting vacant, while rates, etc.,are still being paid. 


My older brother owns his own property and has a line of credit on it (not invested in anything). I own my own home and have a line of credit on it,which is invested in a managed share plan (the share plan and debit balance on the line of credit are both approximately $500k). 


We are both coping well with our level of debt and still manage to save. However, my younger brother still has a mortgage balance of $400k on his home but also wants to buy out his ex-partnerfor half the house (say,$700k). We are all in the higher tax brackets. 


We’d really like to help my younger brother get more financially secure and at least pay out the ex-partner for his house. How can we best utilise the inherited family home to do this?


We’ve considered selling or renting it out (typical rents in this area are $1,500–$2,000 per week), or trying to utilise the equity and tax-effectively negatively gear, but don’t know how. What is your advice?


A: The taxes most relevant in the case of residential property investments include capital gains tax (CGT), income tax, and land tax.


Capital gains are calculated as the difference between the sale price and the cost base. The cost base includes the purchase price, stamp duty, legal fees, and pest and building inspections. 


The cost base also includes the cost of repairs immediately after acquisition. Any capital renovations are considered part of the cost base. 


There are no tax impacts with inherited real estate until a disposal/sale happens and a CGT event occurs. With inherited real estate, one of the first considerations is the date when the property was first acquired by the deceased. If acquired before 19 September 1985, then the cost base for the beneficiaries will be the market value on the date of death. 


Where disposal is made within two years of the date of death, there will be no CGTtax impacts. So the proceeds are obtained free of tax by the beneficiaries (attractive if you want the cash quickly).


Where the disposal is made after the date of death, there will be CGT implications for the beneficiaries if the sale price exceeds the cost base.


If the property was acquired before 1985 and a renovation was added after that date, they are usually treated as separate assets. Capital gains, if applicable, are apportioned.


If the deceased acquired the property after 19 September 1985 and the property was their main residence for the entire ownership period,the impact issimilar to above. 


If the property was a rental investmentpurchased prior to 1985, the situation is also similar. However, if it was purchased after 1985, the cost base for the beneficiaries is the same as it was for the deceased when he first purchased it. This means there will be CGT payable on disposal after two years. (Who said there wereno death duties in Australia? They are built into the CGT system.)


Capital renovation

Assuming the property was always the main residenceand was first acquired post-1985, the first consideration would be its future potential,given its location and proximity to the beach in the eastern suburbs of Sydney,an upward-trending market.


Retaining and improving the property may produce future capital gains(even after tax), which may be better than immediate sale. It also saves on agent’scommission (on sale) and stamp duty if another investment property is to be purchased. Improvements may increase the rentalvalue, although they do need cash investment.


With no interest expense from a loan used to acquire the property, a ‘negative gearing’ result would be hard to achieve. The net positive income couldeffectively be used to service debt on another investment – negatively geared.


While a solution to suit all three siblings may be a bit challenging, due to the different financial positionsof each, selling may support the youngest in the short term. 


– Shukri Barbara


CGT Calculation

Q: I was wondering if you could tell me how I can work out how much capital gains tax [CGT] would apply in this situation.


I recently sold my unit at North Parramatta, and it settled on 15 January 2013.


I bought it for $125,000 approximately 20 years ago. It was my PPOR [principal place of residence] until March 2011 when my family and I moved to a larger townhouse with two bedrooms and two bathrooms at Northmead. 


The plan was to rent out the unit ($370/week) and also rent the townhouse ($410/week). The unit was my investment property. About five months down the track, our townhouse was put up for sale. 


I purchased the townhouse for $419,000 and settled on this property in October 2011, and kept renting the unit as an investment property until November 2012 when I sold it for $327,000. My family and I are still living in our townhouse at Northmead. I rented the unit at North Parramatta as an investment property from April 2011 until mid-January 2013.


I am wondering if and how much capital gains tax I will have to pay after selling my unit at North Parramatta, taking into account that the market has actually gone backwards since 2011 when my unit was turned into a rental property!


A: The capital gain made on the unit at North Parramatta could be fully CGT exempt if you continuedto treat it as your main residence after you moved out in March 2011. In that case, no other property could be treated as your main residence at the same time. If the townhouse was acquired in October2011 and sold after five months, any capital gain on the townhouse would be fully subject to CGT. 


A second option would be if you didnot treat the unit as your main residence after you moved out in March 2011. The cost base of this unit would be deemed to be the market value in March 2011 when it was first rented out. The capital gain would be $327,000,less the market value in March 2011. You could also apply the 50% CGT discount to the gain. 


The townhouse couldbe treated as your main residence for the entire period of ownership and the capital gain would be fully exempt.


– David Shaw


David Shaw Shukri Barbara

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  • Mitch says on 17/07/2013 05:01:24 PM

    Hi we inherited a 1/8th share portion of our family home after my fathers death 7 years ago. The new wife of our father got 60% and has lived there free of charge ever since. We (myself and other siblings ) pay our proportion of rates and other outgoings for the property (as does his wife).
    Firstly; can this property be treated as an "investment property" for taxation purposes.?
    And if so
    Are we able to claim these expenses as a loss ?

  • louie says on 26/10/2013 09:42:13 PM

    i have purchased a property in point cook melbourne for 505000 with a settlement date in december.
    i own my own property in prahran worth 700000.
    what advise can you provide in relation to the purchasing names on title aswell as strategy to further investments

  • Tina Lindsay says on 28/02/2014 02:24:50 PM

    My parents have just won inquiring on behalf of my elderly mother. Her father died in 1992 and her brother continued to live in her fathers home whichhas been the family home since 1940. When her brother let the home deteriate a court case study arted as he refuse to sell. A court order forced the sale of the home in Dec 2013. What taxes on the sale of the house is owing. Brother is and sister received half value each. Thankyou.

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