Q: My sister and I inherited (in equal shares) my late mother’s family home – which Mum purchased five years ago – after she passed in 2016. The property was transferred into our names (as Tenants in Common) in September 2017. We plan to keep it for three to five years as an investment property.
We understand that people who acquire property after 10 May 2017 cannot claim depreciation on depreciating assets within a second-hand residential property, but that it won’t affect how we depreciate the structure/building itself.
Given that when we sell this property CGT will be calculated from date of death, does it then hold true that, for all intents and purposes, this is when it became an investment? Can we therefore depreciate the assets within the property as if we acquired the property as at the date of death? Are we deemed to have acquired the property at date of death?
Otherwise, isn’t it a double standard that we should have to pay CGT on a property that was deemed ours from that date, but we cannot use that date for the purpose of depreciation as per the new legislation?
We understand that if we sold the property within two years of the date of death that the sale would be exempt from CGT. We understand that the base value for CGT purposes is the value at date of death.
We engaged a valuation company for a valuation effective from date of death, and have been given a certified valuation.
- Kind regards, Amanda
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A: As you have indicated, death itself does not generally trigger a CGT event. In the case you’ve outlined, the CGT event will be realised by you and your sister when the property is sold. For CGT purposes, the date of acquisition is the date of your mother’s passing, and for the application of the main residence exemption the cost base will be the property’s market value at date of death.
In relation to your specific question on legislative changes to depreciation/the capital allowance regime, which are directly impacted by whether you owned a rental property, or entered into a contract to purchase a rental property, before 7.30pm on 9 May 2017, this is an interesting question. As the legislation is relatively new, there is limited public guidance on your specific scenario, and I have yet to come across the issue in practice. As you are deemed to have aquired the property at the date of your mother's passing for CGT purposes, for broader taxtion purposes it is arguable that you owned the property prior to these changes on 9 May 2017.
However, the Bill that incorporates the legislation contains commentry on the requirements for assests held 'on' 9 May 2017. In simple terms, it explains that for a depreciation expense to be an allowable deduction for assets held prior to 9 May 2017, it must have been claimed as a deduction in the year ended 30 June 2017.
Accordingly, on the basis that you/the estate did not have the property available for rent during the financial year ending 30 June 2017 (and hence did not claim a depreciation expense deduction that year), it would appear that you are unable to claim a deduction for depreciation on these assets going forward.
However, as noted above, the legislation is relatively new. Other than contacting the ATO to seek further clarity, it may be a case of ‘watch this space’ for further guidance on this topic.
"For assets held prior to 9 May 2017, [depreciation] must have been claimed as a deduction in the year ended 30 June 2017"
Need to know
- The CGT cost base for an inherited property is its market value at the date of death.
- To qualify for P&E depreciation, a property must have been available for rent during the 2017 financial year.
- Investors should contact the ATO for clarity on evolving matters.
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