CGT Implications on Inherited Dwellings – by Gerard

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Inherited dwellings

If you inherit a dwelling and later sell or otherwise dispose of it, you may be exempt from capital gains tax (CGT), depending on:

  • when the deceased acquired the property
  • when they died
  • whether the property has been used to produce income (such as rent)
  • whether the deceased was an Australian resident at the time of death.

If you’re not exempt, or only partly exempt, you need to know the cost base of the dwelling to work out your capital gain. The cost base may be the value of the dwelling when the deceased acquired it or the value when they died, depending on the circumstances above.

The same exemptions apply if a CGT event happens to a deceased estate of which you’re the trustee.

These rules don’t apply to land or a structure you sell separately from the dwelling – they are subject to CGT.

Cost base of an inherited dwelling

If you inherit a dwelling there are special rules for calculating your cost base.

The first element of the cost base or reduced cost base of a dwelling – its acquisition cost – is its market value at the date of death if any of the following apply:

  • the dwelling was acquired by the deceased before 20 September 1985
  • the dwelling passed to you after 20 August 1996 (but not as a joint tenant), and just before the deceased died it was their main residence and was not being used to produce income, or
  • the dwelling passed to you as the trustee of a special disability trust.

In any other case, the acquisition cost is the deceased’s cost base or reduced cost base on the day they died. You may need to contact the trustee or the deceased’s tax adviser to obtain the details. If that cost base includes indexation, you must recalculate it to exclude the indexation component if you prefer to use the discount method to work out your capital gain from the property.

If you’re a beneficiary, the cost base or reduced cost base also includes amounts that the trustee of the deceased’s estate would have been able to include in the cost base or reduced cost base.

CGT exemptions for inherited dwellings

If you inherit a dwelling and later sell or otherwise dispose of it, you may be fully or partly exempt from capital gains tax (CGT).

Deceased died before 20 September 1985

If you inherited the dwelling before 20 September 1985, any capital gain you make when you dispose of it is exempt.

Any major capital improvements you make to the dwelling on or after 20 September 1985 may be taxable.

Deceased acquired the dwelling before 20 September 1985 and died on or after 20 September 1985

In this situation, the dwelling need not have been the main residence (home) of the deceased person.

CGT does not apply to the dwelling if either of the following conditions is met:

  1. Condition 1 (disposal within two years):

You dispose of your ownership interest within two years of the person’s death – that is, if the dwelling is sold under a contract and settlement occurs within two years. This exemption applies whether or not you use the dwelling as your main residence or to produce income during the two-year period.

  • Condition 2 (main residence while you own it)

From the deceased’s death until you dispose of your ownership interest, the dwelling is not used to produce income and is the main residence of one or more of:    

  • a person who was the spouse of the deceased immediately before the deceased’s death (but not a spouse who was permanently separated from the deceased)
  • an individual who had a right to occupy the dwelling under the deceased’s will
  • you, as a beneficiary, if you dispose of the dwelling as a beneficiary.

The dwelling can be the main residence of one of the above people, even though they may have stopped living in it, if they choose to continue treating it as their main residence.

A dwelling is considered to be your main residence from the time you acquire your ownership interest in it if you move in as soon as practicable after that time.

Deceased acquired the dwelling on or after 20 September 1985

You disregard any capital gain or loss you make when a CGT event happens to the dwelling (such as selling it) if either of the following applies:

  • the dwelling passed to you on or before 20 August 1996, and:    
    • Condition 2 (main residence while you own it) above is met, and
    • the deceased used the dwelling as their main residence from the date they acquired it until their death and did not use it to produce income
  • the dwelling passed to you after 20 August 1996, and:    
    • Condition 1 (disposal within two years) or Condition 2 (main residence while you own it) above is met, and
    • just before the deceased died it was their main residence and was not being used to produce income.

A dwelling passes to you when you became its owner or, if you became absolutely entitled to it before or without becoming its owner, at that time. (The trustee or executor should be able to tell you whether or not you became absolutely entitled to it and, if so, when).

*source from ATO