Tax Q&A: Property Inheritance and CGT, Answered

By
15/02/2018

Got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
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Q: My parents own three properties. They are separated but not divorced. One property is in my mum’s name (which she lives in), another property is in my dad’s name (which he lives in), and the third is an investment property that they own jointly. All properties were purchased after 1985. When they pass away and my sister and I inherit their properties, will we have to pay capital gains tax if we sell? Is the investment property treated any differently?

- Thanks, Jackie



A: If two of the properties are your mum and dad’s ‘main residences’ at their dates of death, any capital gain you and your sister make on the sale of your interest in those properties, within two years of the relevant death, will be exempt from capital gains tax (CGT). You and your sister may make a capital gain if the property is sold two or more years after that parent’s death, though you may be able to extend the two-year exemption period on application to the ATO.

 

 

"You could reduce your capital gain against any capital losses each of you has made during the year"


Note that ordinarily a husband and wife would only be entitled to one main residence exemption between them, except if they live permanently separately and apart from each other. 

Regarding the investment property, since the property is jointly owned I assume it will pass to the surviving parent on the death of the first. You and your sister will inherit the property under the will of the surviving parent and will be treated as acquiring the property on the date of his or her death. If the property is not the main residence of either of you, it will not be eligible for any exemption from CGT. 

Instead, you and your sister will make a gain on the sale of the property based on the sale price, minus the ‘cost base’ for the property. 

The cost base is comprised of five elements. The first element is the cost base of the investment property on the day the surviving parent dies (ie the price your mum and dad paid for it, plus certain other costs). In other words, you inherit your parents’ cost base. You will need to contact your parents’ tax advisor to obtain details of the cost base.

You can increase the cost base if you and your sister have incurred costs under one or more of the other four elements, which broadly include real estate agent fees, conveyancer fees, council rates, any stamp duty paid, and any capital expenditure incurred to increase the property’s value.

You could reduce your capital gains by offsetting them against any capital losses each of you has made during the year, and any unused prior year net capital losses. The remaining gain can then be reduced by 50% if the property is sold at least 12 months after the first parent dies. 

As an alternative to applying the 50% reduction, you may be entitled to index the cost base if the property was purchased before 21 September 1999. Check with your tax advisor which option results in a smaller capital gain. You would then each pay tax on your share of that capital gain.

Need to know
- Gains from selling interest in a 'main residence' property within two years of a death are CGT-exempt.
- Couples qualify for one exemption per main residence property, unless they are permanently separated.
- The cost base may be indexed if the property was purchased before 21 September 1999.

 

Jessica Pengelly

is senior associate at Finlaysons Lawyers
 

 

 

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Comments
  • RB says on 13/02/2018 07:43:51 AM

    Hi
    I have 2 investment properties, in which 2 of my children live in, separately ( one in each)
    They pay market rent, and is declared in annual returns
    What is the best way for me to limit tax payable when they “inherit “ same, either through gift or death?

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