Tax Tip 302: Not All Properties Purchased Prior to 1985 are Exempt from CGT

The trap for old players is if 2 people purchase a property in say 1980 and then one of them dies the other might inherit the share of the other – post 1985 and this could mean the property is no longer totally exempt from CGT because under section 118-195 ITAA97 the share inherited has a cost base of the value at the date of the death.


Example

Homer and Marge bought a property in 1984, prior to the introductions of CGT. They realise this property will be CGT exempt so they rent it out and live in another property. This is a good strategy as they now have 2 properties CGT free.


Homer goes and dies in 2009. At the date of death Marge automatically becomes the sole owner of the investment property. They were joint tenants so the property passes by the right of survivorship and not by Homer’s will.

In 2020 Marge sells the property as she needs some money for the cryonic preservation of her body in anticipation of future generations finding a cure for old age.

The property was purchased in 1984 for $43,000. When Homer died in 2012 it was worth $1mil and when Marge sells it in 2020 it was worth $2mil.

Marge thinks great, she can book a trip on Elon Musk’s unmanned spaceship as well as paying for the cryonic preservation of her body. This does this on the assumption that the $2mil is tax free.

Little does Marge realise that it is not tax free.

Only her original 50% is tax free.

The 50% inherited from Homer is subject to CGT as it is a post CGT asset now.

The cost base is $1mil x 50% (because Homer owned 50%) and the sale price was $2mil x 50% = $500,000 capital gain.

The 50% CGT can be applied making this $250,000 but that will still leave Marge with a $100,000 tax bill.

She rings Elon and asks him to downgrade her seat to economy class.

 

BTW, there are at least 2 other ways a property purchased prior to 1985 may be subject to CGT