If you’re the beneficiary of a property (meaning the property passes to your ownership) as part of a deceased estate, you may be wondering whether you’ll need to pay capital gains tax (CGT) on the home if you choose to sell it.
This article aims to provide a general overview of when the Australian Taxation Office (ATO) says CGT may and may not be payable on deceased estate property. However, this can be a complex topic, so it may be a good idea to seek professional advice on matters concerning a deceased estate in your particular circumstances.
What is capital gains tax (CGT)?
CGT is tax that is payable when you sell a “capital asset”, such as shares or real estate, according to the ATO. CGT is actually part of your income tax, not a separate tax, as the earnings (or loss) you made from selling an asset are added to your assessable income for tax purposes (including your salary and any income received from investments) in the tax year you sell it.
The ATO specifies that assets you acquired on or after 20 September 1985 (when CGT was introduced) are subject to CGT, with the exception of personal assets such as the home you live in, your car and personal belongings, and “depreciating assets used solely for taxable purposes”, such as business equipment. You need to report any capital gain or loss you make in a given financial year when you complete your tax return, the ATO adds.
What is a deceased estate?
A deceased estate is the name for all the property and assets belonging to a person who has passed away. When a person dies, the assets that form their estate, such as real estate, shares and belongings, may pass directly to their beneficiaries or to their legal representative (such as an executor), or from their legal personal representative to their beneficiaries.
If you’re the beneficiary of a property as part of a deceased estate, you are considered as having taken ownership of the property on the date of the person’s death. According to the ATO website, other inherited assets are generally subject to CGT, but there are special rules regarding dwellings, especially properties which were the main residence of the deceased person.
Do you pay capital gains tax on deceased estate property, and if so, when?
Whether you’ll have to pay CGT on inherited property (or whether you are exempt or partly exempt) can depend on a number of factors. These include whether it was the deceased’s main residence, whether it has been used to generate an income (i.e.: rented out or used as a home office), when the deceased passed away, and when they acquired the property, according to the ATO.
The ATO website says if you inherit a home and later sell it, or otherwise dispose of it, you may not need to pay CGT in the following scenarios:
1. If the deceased person died before 20 September 1985, any capital gain you make when you dispose of the property is CGT-exempt, but any major capital improvements (such as a renovation) you made to it on or after this date may be taxable.
2. If the deceased acquired the dwelling before 20 September 1985 but died on or after 20 September 1985, CGT does not apply, providing one of the following requirements is met:
- Condition 1: You sell the property within two years of the person’s death (meaning it is sold under a contract and settlement occurs within two years). This applies whether or not you live in the property as your main residence or use it to earn an income during this time. You can also apply to have this two-year period extended if the delay in you selling the home is due to circumstances beyond your control.
- Condition 2: From the time of the deceased’s death until you dispose of your ownership interest (such as by selling the property), the property is not used to produce an income (such as renting the property out) and is instead used as the main residence of either the spouse of the deceased when they died, another person with the right to occupy the home under the deceased’s will, or you as a beneficiary.
3. If the deceased acquired the dwelling on or after 20 September 1985 and the dwelling passed to you on or before 20 August 1996, you may be exempt from CGT provided you meet Condition 2 above, and the deceased also used it as their main residence from the date they acquired it until their death and did not use it to produce an income.
4. If the deceased acquired the dwelling on or after 20 September 1985 and the dwelling passed to you after 20 August 1996, you may be exempt from CGT if you meet either Condition 1 or Condition 2 above, so long as the deceased was using it as their main residence and not to produce income just before they died.
If the property has been used to produce an income or was not the deceased’s main residence, the ATO says CGT may be payable on some or all of the capital gain. The ATO website has a questionnaire you can complete, to give you an indication of whether the dwelling is exempt from CGT, as well as advice on calculating partial exemptions (if eligible).
If you are not exempt from CGT, the ATO says you will need to know the cost base of the property, which is the market value of the property when the deceased acquired it or when they died, depending on your circumstances. This value will be used to calculate your capital gain.
What if the asset is transferred to a charity or a foreign resident?
According to the ATO, when the asset is transferred to a charity or a foreign resident under the terms of the will, CGT will apply and must be included in the person’s date of death tax return.
What if I inherit an interest in a property when my partner or joint tenant dies?
When you own a property with another person, for tax purposes you may be tenants in common or joint tenants, according to the ATO. It states that if a tenant in common dies, their share of the property is considered part of their deceased estate and can be either transferred to a beneficiary or sold. If a joint tenant dies, on the other hand, their interest in the asset is acquired by the surviving joint tenant or joint tenants on the date of their death and is not considered part of the deceased estate. The ATO says if you are a joint tenant of a property you and the deceased both lived in and you continued to use it as your main residence after they died, you’ll generally be exempt from CGT. However, if the property has been used to produce an income, you may need to pay CGT when you sell it.
What records and documents do I need to keep?
As with any financial or legal matter, it’s important to keep any documents and records related to the deceased estate or the property you have inherited, to ensure your liabilities and/or entitlements are calculated correctly and you can prove this should the ATO ask for evidence. The ATO advises you should keep the following information:
- A copy of the valuation, showing the market value of the asset on the date the deceased died. Their legal personal representative may have already done this, but if not, you’ll need to organise a valuation yourself;
- Records of any relevant costs incurred by you or the previous owner, such as those incurred by the legal personal representative.
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About Emily Boyd
Emily Boyd is a freelance journalist and editor from Melbourne. She has a Masters degree in International and Community Development, and is a self-confessed research nut who loves to take tricky topics and make them more accessible and digestible to empower her readers. She’s also a mum of three and an enthusiastic amateur baker.