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

Discussion in 'Accounting & Tax' started by Terry_w, 9th Sep, 2019.

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  1. Terry_w

    Terry_w Well-Known Member Business Member

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    I recently posted about how a property can be passed on with any CGT liability wiped out if it is the main residence of the deceased person at their death

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


    This is perhaps one of the most important yet simple strategies out there. If you think about it you can die and leave your estate 2 properties potentially CGT free. This can be a very handy boost for the family you leave behind.


    Here is how it could work

    Move into your investment property with the largest capital gains just prior to your death. Establish it as your main residence.

    (just wheeling in the corpse of someone who has just died, similar to the Weekend at Bernie’s movie, won’t work)

    Move out of the main residence and rent it out.


    Any CGT in the investment property will be wiped out if it is the main residence of the decreased (s 118-195 and s 118-190 ITAA97).

    The cost base of the former main residence will be reset to the market value at the time it was first used to produce income – which would be the value very close to your death.

    Modifying the example, I did in Tax Tip 231


    Example

    Homer had purchased his main residence (property A) about 20 years ago for $100,000 and it is now worth $2mil.

    Homer also purchased an investment property (Property B) next day 19 years ago, for $100,000 and it is now worth $2.1mil.

    If Homer sold the main residence it would be CGT free, but if he sold the investment property there would be a $2mil capital gain. Approx $500,000 tax would be payable if he sold.

    Homer get struck down with cancer. He knows he is not going to make it so he moves into his investment property and rents out his main residence.

    He dies six months later.

    Homer leaves his properties to his 2 children, Property A to Bart and Property B to Lisa.

    The cost base for Property A is $2mil, the value at the date of death.

    The cost base for Property B is $2mil, the value at the date of death.

    If either Bart or Lisa immediately sell they will not be subject to CGT

    Bart lives in his property and Lisa lives in her property and they live happily ever after (until they get diagnosed with cancer 40 years later when they move into their investment properties)
     
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  2. Silverson

    Silverson Well-Known Member

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    Any CGT in the investment property will be wiped out if it is the main residence of the decreased (s 118-195 and s 118-190 ITAA97).

    Is this the corresponding legislation for tax tip @Terry_w ?
     
  3. Terry_w

    Terry_w Well-Known Member Business Member

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    yes
     
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  4. willair

    willair Well-Known Member Premium Member

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    Quote..
    Bart lives in his property and Lisa lives in her property and they live happily ever after (until they get diagnosed with cancer 40 years later when they move into their investment properties)

    That's a interesting way to look at the end game,and for the less then 100 bucks to support this site and the win at all costs attitudes of your posts are priceless..thanks..
     
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  5. SatayKing

    SatayKing Well-Known Member

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    It is still all about ME!
    Happy days I guess. An example of reality but nevertheless....
     
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  6. Trainee

    Trainee Well-Known Member

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    Terry is this this how it works:
    Property A is under the 6 year rule which is based on the person living there as a past ppor.

    Property B is under s118-195 which is triggered on death.

    So it’s an exception to the cannot have 2 ppors simultaneously issue?
     
    Last edited: 9th Sep, 2019
  7. Mike A

    Mike A Well-Known Member

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    Was the cancer as a result of being so close to the nuclear reactor ?
     
  8. datto

    datto Well-Known Member

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    Homer used to heat his lunch and coffee inside the reactor.
     
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  9. Mike A

    Mike A Well-Known Member

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    In this example homer has died as well so im thinking it probably wasnt such a great idea
     
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  10. thesuperman

    thesuperman Well-Known Member

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    A few questions:

    1. Does the main residence need to be rented out for this strategy to work or can it just be left empty and the investment property become the new main residence?

    2. Can both the properties go to Bart or one needs to go to Bart and one to Lisa for this to work?

    3. For this strategy to work then I presume 100% of both property needs to be owned by Homer. It wouldn't work if the investment property that is moved into is 50/50 or jointly owned between Homer & his son Bart? Then for Bart to get the both properties through Homer's will.

    4. I presume moving into an investment property can only be done for residential. There's no way to move into a commercial property for this strategy I presume? :)
     
  11. Terry_w

    Terry_w Well-Known Member Business Member

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    1. The cost base of the first property needs to be reset which will occur when it is first rented out.

    2. They can go to anyone

    3. Yes it only works on the death of the owner. Each joint owner has different interests.

    4. It could work on commercial property if it qualifies
     
  12. Terry_w

    Terry_w Well-Known Member Business Member

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    No the 6 year rule doesn't need to be used. You would only have one main residence under this strategy
     
  13. Trainee

    Trainee Well-Known Member

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    So property A would just be seen as used for income producing purposes? Ie the cost base is as at when it becomes an ip.

    Property B would be ppor at death.
     
  14. Terry_w

    Terry_w Well-Known Member Business Member

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    yes
     
  15. FredBear

    FredBear Well-Known Member

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    To optimize this strategy there is a calculator to help:

    Interactive | When will you die?

    Enter your sex and date of birth, and plan to move into your IP just prior to this date :)
     
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  16. MWI

    MWI Well-Known Member

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    What is this calculator, grandma lived till 86, mum still alive at 80 just has a new boyfriend at age 87, her closest friend is 86, dad lived longer and I am predicted to live to age 83 only?:eek:
    I was planning to live to at least 100 not 83 or so as predicted by this calculator!:p
     
  17. Terry_w

    Terry_w Well-Known Member Business Member

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    I got another 31 years left. should be plenty.
     
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  18. Luca

    Luca Well-Known Member

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    I would sell the 2 properties, pay CGT and have a blast with whatever is left :)
     
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  19. willair

    willair Well-Known Member Premium Member

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    Going by the calculator ,i have 27-5 years to go ..
     
  20. Terry_w

    Terry_w Well-Known Member Business Member

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    Nearly enough to pay off another 30 year loan term.

    I have heard banks will now be using this calculator and the maximum loan period will be the lesser of 30 years or your remaining life expectancy.