Tax Tip 447: Main Residence of Deceased Sold More than 2 years after Death and CGT

person but the person that inherits it rents it out and sells in after 2 years? Normally if the property is sold within 2 years, (actually settles within 2 years of the death) the property could be sold with it being fully exempt, but the exemption won’t be available if settlement is longer than 2 years after death (there are some exceptions)


Example

Homer dies and Barney inherits Homer’s main residence. He rents it out immediately and intends to sell, but the market is slow and when it is eventually sold it is 4 years from the date of death.

It was purchased by Homer for $400,000. At death it was worth $800,000. 2 years after death it was worth $1mil and it was sold for $1.2mil 4 years after the death.

Will the cost base be reset to market value at death, or at the 2 year mark or not at all?


In these situations, the relevant legislation is section 118-200 ITAA97


First the cost base is reset to market value as of the date of death, s 128-15 ITAA97

This means that the Cost Base for Barney would be $800,000 the value at death. Since it was sold for $1.4mil there is a $400,000 capital gain (disregarding a few potential other cost base expenses). Applying the 50% CGT discount means only $200,000 of this would be taxable.

Had Barney sold and settled before the 2 years it would have been tax free completely, but even after the tax he would likely still be ahead.

Legislation

s 128-15 ITAA97 INCOME TAX ASSESSMENT ACT 1997 - SECT 128.15 Effect on the legal personal representative or beneficiary

s 118-200 ITAA97 INCOME TAX ASSESSMENT ACT 1997 - SECT 118.200 Partial exemption for deceased estate dwellings

 

Terry,

What happens if the main residence of the deceased passes to a trust, and then later either sold or distributed to a beneficiary?

For example:

Scenario A:
Homer’s main residence -> trust (Bart and Lisa as trustees) -> distributed to Bart before 2 years

Scenario B:
Homer’s main residence -> trust (Bart and Lisa as trustees) -> distributed to Bart after 2 years

Scenario C:
Homer’s main residence -> trust (Bart and Lisa as trustees) -> sold before 2 years

Scenario D:
Homer’s main residence -> trust (Bart and Lisa as trustees) -> sold after 2 years

Thanks!

 

I believe that if there has been a delay in granting probate then that 2 year period may be extended.


Oops I just reread the first post and you did mention there are exemptions.

 

There is a need for exceptional delay. One for specific advice

 

There is an exemption passing from the deceased to the executor to the trustee to the beneficiary. Even where the testamentary discretionary trust over many years it can be possible to get the CGT exemption, or rollover really.

A Could be no CGT triggered until Bart sells
B Could be no CGT triggered until Bart sells
C could be exempt
D could trigger CGT with cost base value as of the date of death. But could also be exempt if will structured with a right to reside.

 

Thanks Terry!
For scenarios A and B, what would the cost base be? Date of death or the date of distribution from trust to beneficiary?

 

Covered that here
Tax Tip 194: Transferring a Property from a Testamentary Trust to a Beneficiary Without CGT Tax Tip 194: Transferring a Property from a Testamentary Trust to a Beneficiary Without CGT

Tax Tip 199: Passing Assets from a Testamentary Trust to a Discretionary Trust CGT Free Tax Tip 199: Passing Assets from a Testamentary Trust to a Discretionary Trust CGT Free