Welcome to my weekly Insights blog. Once a week, we cover topics such as wealth creation, super, estate planning and tax. This is Part 6 of our 10-part series on how wealthy Australian families build, protect and pass on their wealth.
On the Northern Beaches, the family home or an investment property is often the largest asset in an estate. When it’s inherited, many families are surprised by the capital gains tax rules, sometimes only after they’ve sold.
The good news is that with the right timing, a lot of inherited property can be sold with little or no CGT. The key is understanding a few rules before you make any decisions.
Key takeaways
- Inheriting a property doesn’t trigger CGT. Tax may apply later, when the beneficiary or executor sells it.
- If the property was the deceased’s main residence and wasn’t producing income, it can generally be sold CGT-free within two years of death.
- Property the deceased bought before 20 September 1985 gets a new cost base equal to its market value at the date of death.
- For other investment property, you generally inherit the deceased’s original cost base, so the whole gain since they bought it can be taxed when you sell.
- Get a market valuation at the date of death. It’s often the most important document for working out the tax.
How CGT applies to inherited property
| Situation | Your cost base | CGT when you sell |
|---|---|---|
| Deceased’s home, bought after 20 Sept 1985, never rented | Market value at date of death | Exempt if sold within two years of death; otherwise taxed on growth since death |
| Deceased’s home, bought before 20 Sept 1985 | Market value at date of death | Exempt if sold within two years of death; otherwise taxed on growth since death |
| Investment property bought before 20 Sept 1985 | Market value at date of death | Taxed only on growth since death |
| Investment property bought after 20 Sept 1985 | The deceased’s original cost base | Taxed on all growth since the deceased bought it |
In most cases, the time the deceased owned the property counts towards the 12 months needed for the 50% CGT discount, so individual beneficiaries usually get the discount even if they sell soon after inheriting.
The two-year rule
If the property was the deceased’s main residence just before they died, and it wasn’t being used to produce income, it can generally be sold free of CGT if settlement happens within two years of the date of death.
Two years passes quickly when probate, family decisions and a property market are involved. The ATO can extend the period in some circumstances, such as a delayed probate or a challenge to the Will, and there’s a safe harbour for some delays outside the family’s control. But it’s far better not to rely on an extension.
The exemption can also apply beyond two years if the home becomes the main residence of the deceased’s spouse, a beneficiary, or someone given the right to live there under the Will.
Traps to watch for
- Renting out the home after death. Renting it while you decide what to do can reduce the exemption if you sell after the two-year period. Get advice first.
- A home that was partly rented. If the deceased rented out part of the home, or moved into aged care and rented it, only a partial exemption may apply.
- Foreign residents. If the deceased was a foreign resident for tax purposes when they died, the main residence exemption is generally not available.
- Missing records. Without the deceased’s purchase contract and records of improvements, it can be hard to work out the cost base for post-1985 investment property.
- NSW land tax. If an inherited property isn’t your principal place of residence, NSW land tax may apply from the following land tax year.
Keeping it versus selling it
When siblings inherit a property together, one often wants to keep it while another wants to sell. Common solutions include one sibling buying out the others, or the Will giving the executor power to allocate the property to one child and other assets to the rest.
In NSW, transfers of property to beneficiaries under a Will generally attract only nominal stamp duty. But a sibling buying another sibling’s share outside the estate usually pays normal duty on that share, so the order of steps matters.
Frequently asked questions
Do I pay capital gains tax on an inherited house in Australia?
Not when you inherit it. If it was the deceased’s main residence and wasn’t producing income, you can generally sell it CGT-free within two years of their death. Otherwise, CGT may apply when you sell, depending on when the deceased bought it and how it was used.
What is the cost base of an inherited property?
It’s the market value at the date of death if the deceased bought it before 20 September 1985, or if it was their main residence and not producing income. Otherwise, you generally inherit the deceased’s original cost base.
Can I move into an inherited house and avoid CGT?
Often, yes. If the deceased’s home becomes your main residence, the exemption can continue beyond two years. Any period you rent it out may reduce the exemption, so check before making plans.
Make the decision before the clock runs out
The CGT outcome on an inherited property often comes down to a few decisions in the first year: when to sell, whether to rent it, and who keeps it. Wealthy families get advice early, before signing anything.
At TaxAssist Accountants Dee Why, we help Northern Beaches executors and beneficiaries work out the CGT position on inherited property and plan the best timing to sell or keep it. Call us on (02) 9045 1511 or email [email protected] before you make a decision.
This article contains general information only and does not take into account your personal circumstances. It is not legal or financial product advice. Please speak with a qualified adviser before selling or transferring an inherited property.
