Dealing with property inheritance is tough, especially when it comes at a time when you’re already experiencing a loss. It’s a tricky journey with lots of red tape, and tax talk is probably the last thing you want to be juggling.
But like it or not, it’s pretty crucial to get your head around capital gains tax (CGT), especially if you want to avoid unnecessarily paying it if you eventually decide to sell the inherited property.
So, despite the circumstances, knowing how to manoeuvre through these taxing laws can be advantageous, finding pathways that could potentially limit your CGT liabilities.
This blog aims to demystify the Australian CGT rules on inherited properties, offering clarity and peace of mind in a challenging time.
Understanding Capital Gain’s Tax
Capital Gains Tax (CGT) is a type of tax that the Australian Taxation Office (ATO) levies on the profit made from selling or disposing of an asset, including property, shares, or investment bonds.
It’s not a separate tax but a part of your income tax.
Here’s some things to consider if you sell an investment property and have to deal with CGT
|Understanding capital gains||A capital gain occurs when you sell an asset for more than it cost to acquire. This ‘gain’ is what the Australian Taxation Office (ATO) taxes you on.|
|Calculating CGT||A CGT event happens when you sell or dispose of the property. This is when you’ll need to calculate the potential capital gain or loss and understand the tax implications.|
|CGT events||A CGT event happens when you sell or dispose of the property. This is when you’ll need to calculate the potential capital gain or loss, and understand the tax implications.|
|Exemptions and discounts on CGT||In some circumstances, you may be exempt from paying CGT. For example, you won’t have to pay CGT on the sale of your main residence due to the main residence exemption. There may also be discounts and concessions available, especially for properties held for more than 12 months.|
Capital Gains Tax Implications For Inherited Property
Now, let’s say you’ve inherited a property. Will you have to pay CGT when you acquire it? What about if you decide to sell? Let’s find out.
Does a Beneficiary Pay Capital Gains Tax When They Inherit the Property From a Deceased Estate?
As a beneficiary inheriting property in Australia, you generally don’t have any CGT liability when you inherit the property. CGT is only triggered when a ‘CGT event’ occurs, such as selling or transferring the property.
Will the Beneficiary Have to Pay CGT if they Sell the Inherited Property?
When you decide to sell the inherited property, you might be required to pay CGT based on the increase in the property value since the date of the original owner’s death.
To calculate your CGT liability, you need to subtract the property’s cost base from its selling price. The cost base typically includes the property’s market value at the time of the original owner’s death plus any associated costs (e.g., legal fees, stamp duty).
You should make sure that the cost base accounts for all original acquisition costs and any capital improvements that the previous owner made – because the higher your cost base, the smaller your gain will be. And the smaller your gain, the less tax you’ll have to pay.
However, there are some instances where you’ll be able to avoid capital gains tax on your inherited property because the ATO allows for some exemptions.
CGT Exemption: Inheriting the Property Before 20 September 1985
If you inherited the property before September 20, 1985, there’s good news! In this case, you’re exempt from CGT on inherited property. This rule applies because CGT was only introduced in Australia on that date. However, if you make any significant improvements to the property after September 20, 1985, you might be liable for CGT on the increased value of the property due to those improvements when you eventually sell or transfer the property.
Strategies to Avoid Capital Gains Tax: Two-Year Rule for CGT
According to the two-year rule, if you dispose of an inherited property within two years from the inheritance date, you could avoid CGT regardless of how you chose to use the property.
For example, even if you decide to rent the property out to generate some income while you decide what to do with it (i.e., sell it or keep it), as long as you sell it within the two-year window, you won’t have to pay CGT.
In some cases, you might be eligible for an extension of the two-year time limit. Consider seeking professional advice for your specific situation if you need to request an extension for the deadline.
What if I Don’t Qualify for an Exemption?
In cases where you don’t sell the property within the two-year window and the previous owner chose to generate income (i.e. it wasn’t the deceased’s main residence), either at some point during their period of ownership or right before their death, you might still qualify for a partial exemption.
Essentially, the ATO will only require you to pay capital gains tax on the period where the property was rented out (i.e., non-residence days).
A capital gains valuation will tell you exactly how much CGT you’d be liable for.
- Dealing with property inheritance can be challenging, especially when you’re also faced with potential Capital Gains Tax (CGT) implications.
- CGT is levied on the profit made from selling or disposing of an asset like an inherited property. Understanding how CGT works can help you mitigate any potential tax burdens.
- There are strategies to limit your CGT liabilities when selling an inherited property, such as understanding and utilising tax exemptions and concessions.
- If the inherited property was obtained before September 20, 1985, or if it is sold within two years of inheritance, you could potentially avoid CGT.
- In certain scenarios, a partial CGT exemption could apply if the property was used to generate income at some point.
Given the complexity of these laws and their potential impact, it’s always advisable to seek professional advice to navigate these rules effectively and legally.