Capital gains tax inherit investment

Discussion in 'Accounting & Tax' started by Xben, 20th Nov, 2020.

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  1. Xben

    Xben Member

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    Hi,

    Just have a quick question that I hope someone can enlighten me on

    My elderly parents own a house they live in and an investment unit they’ve rented from time of purchase. They plan on selling the house for me to purchase my own property. If they move into there investment unit and make it there primary place of residence, upon there death when I inherit there unit and sell within 2 years, will capital gains tax apply at all? as it would be there primary place of residence upon death

    both properties were purchased after 1988


    Thanks
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    They may want to consider aged care and personal advice. Selling means a exempt asset could affect pensions and benefits (eg the dreaded ACAT test and assets and income tests) and there may even be benefits of using concessions to put the cash into a superfund depending on ages so its tax free. How you described it is called "gifting" and this could bite them for benefits incl aged care. Leaving in a will will defer the issue obviously but with the inevitable inheritance it will mean no duty and even no CGT etc. The "other" property could be sold within 2 years of the date of their death but no it wont be CGT free unless they both successively die and its the main tresidence of each of the deceased immediately prior to death (incl a absence while in hospital or care). That isnt always that easy to plan. I have seen many elderly people move to aged care for 6-10 years destroying that concept.

    Your post seems framed soley from your perspective of saving yourself tax where their impacts are likely far higher.
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have some posts that might help:

    Tax Tip 313: Strategy for Single Person to Save Tax on Super at Death Tax Tip 313: Strategy for Single Person to Save Tax on Super at Death

    Tax Tip 249: The 2 year Main Residence Rule After Death Tax Tip 249: The 2 year Main Residence Rule After Death

    Tax Tip 241: Leave your children 2 properties CGT free on death Tax Tip 241: Leave your children 2 properties CGT free on death

    Tax Tip 231: Inheriting a former investment property and CGT Tax Tip 231: Inheriting a former investment property and CGT

    Tax Tip 220: Strategy to Avoid CGT for generations to come (forever?) https://www.propertychat.com.au/community/threads/tax-tip-220-strategy-to-avoid-cgt-for-generations-to-come-forever.39833/
     
  4. Xben

    Xben Member

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    Thanks for the responses. I can understand there’s a lot of scenarios that could play out. I just wanted to understand what options I had to think about . It was definitely a way I want to save on tax and avoid capital gains tax if possible.
    Reading the text below it seems to emphasise at the time of death, so theoretically if my parents move into there investment unit for the last years of their life which are happy to do so, does that cancel out the cgt or just partially . The wording in the ato website is not quite clear.

    [​IMG]
    Terry_wLawyer, Tax Adviser and Mortgage broker in SydneyBusiness Plus Member
    Where a person inherits a property which was the main residence of the deceased at the time of their death, and it was not income producing at the time of the death, the beneficiary (the person inheriting) can sell that property CGT free if sold within 2 years of the date of death. The settlement needs to happen before the 2 years is up, because of the wording in s 118-195 ITAA97 which indiciates ‘the ownership interest’ must end before the 2 years is up.

    see item 1 in the table at
    INCOME TAX ASSESSMENT ACT 1997 - SECT 118.195 Dwelling acquired from a deceased estate
     
  5. Trainee

    Trainee Well-Known Member

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    Do you parents get, or intend to get, some form of government pension?
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It will depend on the circumstances. They each will have distinct interests in the properties if they are joint owners and will be taxed separately. It is not common for spouses to die together either. Their deaths could be years apart which will change the CGT outcome.
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Although if one spouse acquires a 50% interest from the first deceased spouse then the whole of the property is the main residence of the second deceased at the time of their death all may be OK. And if the two spouses dont both reside in the dwelling at the death of the first it could be an issue. But this may rely on that second person not needing care for 6+ years. If their absence from their main residence exceeds 6 years its all over and any accrued tax liability is inherited by the beneficiary rather than the costbae being the market value on the date of death. But f sold within 2 years any further change in value may not be.

    Its hard to plan a future death. Nothing is certain with death and tax.
     
  8. Xben

    Xben Member

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    They are a couple of years of getting a pension and they are happy to reorganise there assets if it benefits me.
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Even more a concern. Reorganising assest is also called gifting and can affect them (no or reduced pensions ?) for 5 years.
     
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  10. Xben

    Xben Member

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    I think this is much more complicated than I was thinking... looks like I’ll have to prepare for a massive capital gains bill
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I think thats over dramatic but it can be avoided.

    1. Inherit parents home. No duty (big saving),
    2. Inherit apartment and dont sell. No tax.
    3. Retain both or sell #1 and no CGT and use proceeds (tax free) to buy your home

    Patience may be the obstacle.
     
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  12. spludgey

    spludgey Well-Known Member

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    Hang on, your parents aren't even pension aged yet and you're considering their impending deaths?

    Sure, you should consider your eventual deaths, but statistically, they'll be around for a while!

    Also, do they actually want to live in an apartment over a house? If not, say no. The might be able to borrow against their house and give you that money instead.

    upload_2020-11-20_13-25-3.png
     
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  13. Xben

    Xben Member

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    Lol I feel like I’m an elder abuser.

    I think I just misunderstood the follow from
    Ato. Because it was getting rental income even if they make it there ppor before death I guess cgt would still apply

    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.

    I was thinking another option would be to purchase there investment unit and receive the stamp duty concession to avoid higher capital gains tax down the line as property prices are rising... any thoughts?
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    So shift the CGT to them now rather than you later?
     
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  15. Xben

    Xben Member

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    Totally, the less we can give the government the better . I can’t figure out any other way around it so might as well sort it out now
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Death is not a CGT event, so it wouldn't change CGT either way, but you would be paying duty and eating up borrowing capacity. Might still be a debt recycling strategy though.
     
  17. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Your needs are likely inconsistent with their (future) needs. So while YES you potentially could engineer a better tax outcome personally this ignores stamp duty but IF you could be eligible for a concession it may alter that issue. Of course then the parents will incur CGT wont they ? So your duty could be $0 but their CGT is what ? And if they gift proceeds it impacts them further. Its necessary to look big picture.

    Funny you mention elder abuse. I'm not suggesting this AT ALL but I do often see posts like this from kids attempting to plan their own benefits which can be a little dismissive of the impact on parents. Its rare to find the parents asking the same. One recent one the parents lacked literacy and were seemingly dragged down a path they didnt understand. We had a independent legal/tax adviser speak to them in their language and their attitude changed instantly. Seems they lacked all the knowledge they needed. All advisers need to be cautious.
     
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