Tax Tip 231: Inheriting a former investment property and CGT

The main residence can be passed onto a beneficiary at death with any residual CGT liability wiped out, if there is any. This is very important to know as it can save your family hundreds of thousands of dollars in tax.

See

S 118-195 ITAA97 INCOME TAX ASSESSMENT ACT 1997 - SECT 118.195 Dwelling acquired from a deceased estate (see note 1)

s 118-190(4) ITAA97 INCOME TAX ASSESSMENT ACT 1997 - SECT 118.190 Use of dwelling for producing assessable income


Example

Homer had an investment property which he moved into and one day a car smashed through the living room killing him while he was watching TV.

Homer had bought the property for $100,000 and it was now worth $1,100,000 at the time he moved in.

His will leaves all of his assets to Bart.

Bart sells the property 1 year after the death and no CGT is payable. This is the case even though had Homer sold the property himself he would have been up for about $250,000 in CGT.

 

@Terry_w - So Bart's cost base becomes $1.1m - all well and good, but does it?

What was the value of Homer's property when he died (some years after he moved in) or did he die the day he moved in?

Is the onus on Bart to get a valuation for probate or can this be an estate agent's guesstimate for the cost base?

What if Bart sells later than 1 year?

 

So one step in tax planning might be to sell the ppor, then move into the ip with the highest cg when you are about to die?

 

Visions of a fleet of ambulances whizzing about the country transporting the soon to be departed from IP to IP.

 

The trick would be to move out of any pre-cgt property and move into one with a hefty liability. A little hard if you haven't been keeping an eye on your death clock.

 

Advance planning only. Some of us were still learning our letters when cgt was introduced.

 

Many people mistakenly believe all parents property passes tax free at death. And even some other investments. They then sell off property in the estate without seeking tax advice. Often aided by solicitors and conveyancers who also dont ask the right questions. Or the executor passes property to one beneficiary and shares and cash to the other...Without adjusting for accrued tax liabilities We have assisted law firms with actioning legal claims against defective estates who do this by performing a CGT review. Have assisted several. Its like shooting fish in a barrel and the PI insurer quickly gives in.

The key issue isnt about finding a property with the largest tax liability. Its a question about what WAS the taxpayers main residence. The word main shouldnt be ignored. In the example above Homer "moved into" the former IP with all his possessions and established a new home. Tick. But the example of ambos moving people to a property to extinguish a tax liability just wont fly.

 

Do lawyers also provide a guide to these things as part of will preparation? Actual specific advice based on the testator’s specific circumstances and assets?

 

I do

 

It might be higher depending on when he died. Lets assume he died during a boom period, it would be the value at the DOD which would be more than $1.1mil

Probate isn't really relevant for Bart as he is the inheritor. But he will need to prove the valuation if he sold and it wasn't exempt. Generally it would be fully exempt if sold within 2 years of the death, in this situation, and it settled in that period.

Say he rented it out for 5 years and then sold, it would not be exempt from CGT, but the cost base would still be the value as of the DOD.

 

See also this related strategy:
Tax Tip 241: Leave your children 2 properties CGT free on death Tax Tip 241: Leave your children 2 properties CGT free on death