Inheriting a Property

Inheriting a property from a deceased person is commonly believed to be tax free. This is often true but not always and dangerous assumptions can be incorrect.

That may be true if
1. The asset is a pre-CGT asset or
2. The asset is a post CGT asset and the deceased occupied the property as their main residence just prior to death

In addition ....after inheritance in any event the beneficiary may have at least 2 years (longer if the ATO allow) to dispose of the property CGT free for the period after death. But that doesnt always mean the period prior to death is tax free.

Otherwise it then gets complicated.

* Did the deceased improve the property ?
* When did they acquire it (land titles records may assist)
* When did they occupy the property (if ever?)... That portion of their use of the property may still allow a period of exemption.

If the deceased never occupied the property the beneficiary will likely have a tax issue if the deceased acquired property post-CGT. But it can be substantially reduced in most other cases.

And then the 6 year absence rule can be used by the beneficiary to apply to the deceased's use. eg If the deceased was in an aged care facility for the past three years then the absence rule may apply. Perhaps 6 years...Or even longer if the property wasnt rented.

In some cases determine a CGT liability (or lack of liability !!) is very very simple if the property was the deceased home when they died. However it is often necessary to reconstruct the deceased use of the property and specific tax advice obtained to address:
- Spouse / spouse inheritance
- Absence periods from the home
- Multiple residences in the ownership period and ability to use the absence rules so that tax is avoided altogether
- Marital breakdown and CGT costbase issues
- Costs of improvements and cost that the deceased may have incurred that change the costbase

These calculations are also often needed by executors where multiple beneficiaries exist. A beneficiary will generally be granted a share of the estate after allowing for accrued CGT tax issues that the deceased had at the time of their death. BUT if a will leaves a specific gift of property this task of determining the potential tax issue may be unknown to them

 

Inheriting Australian property is nearly always tax free. CGT might apply, but only when the beneficiary sells it.

 

Good reminder. Yes. Death is not itself a CGT event.

However many adverse tax and legal issues can occur with death. eg Care needs to be taken to avoiding leaving a time bomb if a beneficiary in a will is a non-resident at the time they inherit ....it could get nasty soon. A will that leaves the executor the capacity the choice sell the asset may be a better will than one which leaves the property as a specific gift

 

And not only wills should be prepared, but leave paperwork for the executor/beneficiary to work out what the cost base will be. Imagine how hard it would be to even work out how much stamp duty was paid 20 years ago on a property without the relevant paperwork.

If you save things electronically make sure the data is accessable and passwords available.

 

And not a room full of "files".....

My best one was a lovely old lady who died with apparent poverty in a Bondi cottage that was allbut derelict (land was worth a mint). But she had a old ledger book filled with a recent portfolio summary and NOTHING else. She burnt everything just before dying - WHY !!
Lucky Paul spent several days at the State Library reconstructing pre/post CGT. That exercise cost someone a LOT but took the pre-CGT proceeds to $2.5m a taxable was just $1.5m.

My best post death find was a elderly relative who was collecting his two deceased brothers defined benefit super pensions years after they died.

 

Terry,
Can the property be continually passed down on death via a will & in theory never attract CGT as it is never sold?

 

Yes.

And if someone does in the property as their main residence the cgt could be eliminated altogether.

 

Or owned in a trust - Will just passes trust control to beneficicaries. Or a company - Shares can be inherited.

 

But trusts only last 18 years.

Companies last forever but shareholders don't.

BTW Paul do you know why SMSF can last more than 80 years? I don't.

 

What happens with properties that move into a testamentary trust when the person passes?

 

Depends on terms of the trust. Generally would last for up to 80 years. But assets could be passed directly to beneficiaries before that without triggering cgt.

 

Trusts only last 18 years ?

 

Lol

Should be 80.

 

Except for SA trusts but even some SA trust deeds may have a vesting date but would need to see the particular deed.

 

I think most of not all SA trusts will vest within 80 years

 

Thanks Terry,
Just to clarify
Say I own IP#1 & will it to my sister on my death & she keeps it as an IP, then no CGT is payable by her? She can then in turn will it to her daughter, still no CGT is payable unless it is sold? Is that right?
What happens if I will IP#1 to three people & they manage it as an IP?
Under what circumstances is no CGT payable if the property is sold? Does it have to become their PPOR?
Thanks

 

Generally in a will it states that the executor can sell all assets to divide to those who benefit which seems to me to be the best way to do things. To think that you can will an IP to a person and then expect them to keep it for your niece seems unreasonable. Talk to a lawyer and draft your will, a few hundred dollars generally and then it's done.

 

Because SISA contains a defined term of perpetuity tied to member life a statutory limit in not required. The requirement for retirement AND death benefits does this. Its why death benefits MUST be cashed. The EM to the pre SISA Act is available in the Senate Library and says that. Its old school library and if you speak to the librarian about Occ and Super Standards Act you can get a poor quality PDF.

My source...a very skilled Barrister who aske d me that same question.

s14 contains the statutory override to ensure a fund is indefinite.

 

But nott always. Specific gifts arent so discretionary. Property is often a gift not a share

 

No cgt is triggered until sold - generally. Cgt could be triggered if it starts to be held on revenue account for example.

If the property is the main residence of a person at their death the cost base could become the value at death and thereby sold without triggering cgt