Tax Tip 381: CGT Difference Between Joint Tenants v Tenants in Common

There are 2 different ways to structure the ownership of an asset jointly.

Under s 128-50 ITAA97 if a joint tenant dies the surviving joint tenants become the sole owner(s). This triggers a CGT event with the survivor taken to have acquired the share of the property when the deceased did.


Example 1

Homer and Marge buy a property as joint tenants for $300,000 on 1 Mar 2020. It is worth $500,000 on 1 Mar 2021 when Marge dies.

Homer is taken to have acquired Marge’s share for $300,000 on the 1 Mar 2020.


But where a person acquires a share of a property, that was the main residence of the deceased just before they died, and that passed via a deceased estate the cost base of this property will be reset to the market value as of the date of their death had that property been the main residence as of the date of their death.


Example 2

Marge and Homer also had acquired another property on 1 Mar 1998 for $500,000. It was rented out until 1 Jan 2021 when Marge and Homer moved into it as their main residence. When Marge died on 1 Mar 2021 it passed to Homer under the survivorship rules, bypassing the estate as it was held as Joint Tenants.

Because it was Marge’s main residence at the date of her death if it was held as Tenants in Common the cost base would reset to its value then, which was $1.2million. Homer could sell it within 2 years of Marge’s death and not pay any CGT on the share inherited from Marge. But he would still pay CGT on the 50% that he didn’t inherit.

But since it was held as Joint Tenants this is not how it works. Homer didn’t acquire Marge’s share from a deceased estate so his cost base for her 50% is not the value at death, but it is the cost base of the deceased person.

50% of the property increased from $250,000 to $600,000 so that is a capital gain of about $350,000 which could have disappeared with the right structuring. That’s up to about $80,000 in tax.

 

Terry

Lets assume Homer and Marge have a mortgaged property. How do the non CGT issues limit a change of owner when a lender needs to approve and action a change of title (and security !!). I have always wanted to ask...Lets assume Homer dies and its a JT situation. Marg has no job, there is no capacity through savings or super to discharge the residual mortgage and marge cant get finance approval...What happens ? Is it possible that the legal title just remains inconsistent with the CGT interests ?

So Marge holds 50% of legal title plus 50% of beneficial title still in Homers name for the present ?

 

the lender would usually want to see that the borrower is able to service the loan. They are generally flexible in situations like that because they won't want to kick out widow pensioners from their main residences.

I'd be inclined to leave title as it is for as long as possible.

 

Yes from a tax perspective whether title is actually transferred doesnt deny a "CGT interest", which differs from legal onwership, or change the date acquired. We often see cases of people applying for aged pensions where a deceased spouse is on title. Centrelink usually detect it and then want wills etc