Q: I have a question regarding inheritance. My father bought a house and adjacent block in 1951. They were both purchased on separate titles under my father’s name only.
He died in July 1989 and his estate was left to my mother. The block was valued at $40,000 at the date of his death. My mother died in 2014. The house that she resided in has been sold. The block has not yet been sold and is currently valued at around $240,000. When the block is sold, does the estate pay capital gains tax, and if so, is the gain calculated from 1989 when my father died?
If the block is passed to the three children through a will and they then sell it, will the children pay capital gains tax from the date of inheritance
in 2014 or from the date their mother acquired it in 1989?
- Thanks, Rosemary
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A: Your mother is deemed to have acquired the block of land at market value on your father’s date of death. This is because your father acquired the land before capital gains commenced in 1985.
The cost base of the land is not increased for all the holding costs of the land. This is because your mother acquired the land before 21 August 1991. Assets acquired after that date can have the holding costs included in the capital gains tax calculation.
"If the will passes the property to the three children, the estate will make no gain and pay no tax. Then each child will have one third of your mother’s cost base associated with their one third of the block"
If the estate actually sold the land, it would have a capital gains tax bill. The gain would be $200,000 based on your information. As your mother owned the land for more than 12 months, the taxable income from this would be $100,000 – half the actual gain, as the 50% CGT discount would have come into effect after that time.
Assuming no other income, the tax on this gain would be about $26,700
if sold in the first three financial years of estate administration.
If the will passes the property to the three children, the estate will make no gain and pay no tax. Then each child will have one third of your mother’s cost base associated with their one third of the block. The date of acquisition of the property will be deemed to be the date of your father’s death.
Therefore, the cost base will be $13,333 ($40,000 divided by 3) with a market value of $80,000 ($240,000 divided by 3) for each third.
With a gain of $80,000 and a cost base of $13,333, the difference is $66,667. Because the asset has been owned for longer than 12 months, the gain can be reduced by 50%.
Therefore, the taxable profit for each child will be $33,334. This gain will be added to the other taxable income of the child to work out the tax payable on this gain. If there was no other income, the tax payable would be about $3,500.
Need to know
- Holding costs on land acquired before 1985 isn’t included in capital gains tax.
- The date of acquisition is deemed to be the date of the deceased’s passing.
- The market value of the property as of the date of death applies.
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