Tax Tip 94: Inheriting Pre-CGT Property

Discussion in 'Accounting & Tax' started by Terry_w, 2nd Jan, 2016.

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  1. Mike Gerard

    Mike Gerard Member

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    Terry,
    If I sell an inherited property 8 years after probate and have rented it since then... market appraised at that time for more than it's worth now... ie it's dropped in value...
    1. Is CGT Value from first appraisal or current market value?
    ie..since no acquisition cost..can it be a capital loss?..given the lower value now..
    2. if property sells.. will the proceeds be regarded as unearned income which when added to my normal annual income attracts a higher marginal tax rate?
    If so, should I wait till retirement to sell?

    Thanks
    Mike
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Mike, it depends. pre-cgt property, was it the main residence etc death etc.

    CGT would be worked out on the cost base of the property. This would be the cost base of the deceased or the value at death..

    Any CG will be discounted by 50% and added to your income.

    Whether you should sell now or wait till retirement will depend on various thinigs such as income now, excepted income then, size of gain, whether you think the property will increase in value, income received etc etc
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I generally explain to clients that for tax purposes you don't really inherit a CGT asset - That's more a legal issue with a transfer of title. For tax purposes think of it as being inherited with a cost despite not paying anything for it. All property CGT assets have a cost !! . The cost is determined by the CGT rules which apply to the deceased and this may be affected by where they lived and when they bought it. :

    1. Pre CGT - Acquired at the market value at date of death of the deceased.
    - Do you have a valuation ? If not a registered valuer should provide one for that time. This issue can come with a catch. If the person had a spouse and they dies first its possible the pre-CGT issue will only apply to the deceased 50% and not the former spouses 50%.

    2. Post CGT - Acquired at the cost base of the deceased incl other elements of the cost base ie stamp duty, legals, improvements etc. If you cant determine what the deceased paid for the property you may need to do some research. What date did land titles register purchase ? Was it one name or joint ? If so - When did spouse die ? Was any major improvement made to property ?
    etc

    Its generally worthwhile seeking tax advice as assumptions to these issues can lead to serious tax under / and over payments. And land tax issues too. These are often only detected after several years when title is transferred from the deceased to a beneficiary. OSR do a review at that point.
     
  4. Mike Gerard

    Mike Gerard Member

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    Thanks Terry,
    I'm sure it was bought in 1983 as a ppor.28K..I had it appraised after death.245k.(not Valued)..I had it valued about 5 years after acquiring..195K
    The property has dropped about 20% since first appraisal.
    So, I have to get a Valuer to suggest it's value at time of Death?
    If I sell now I will be pushed into a higher bracket..about 190K..
    Appreciate your response.
    Cheers
    Mike
     
  5. Mike Gerard

    Mike Gerard Member

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  6. Mike Gerard

    Mike Gerard Member

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    Paul,
    Thanks for your response as well..I'm led to believe that if you
    take the proceeds from an investment sale & deposit it into a Super fund, it's more tax effective..?

    Cheers
    Mike
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    In that case you may end up with a capital loss if you sold now.
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Not necessarily. Depends. Lets says its a couple aged 64 and retired with no other income. They could enjoy a combined min of $45K tax free outside of super anyway. (At 4% that means capital of $1.125m with tax free earnings). Other considerations include preservation, caps and proposed future capital gains etc
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    That may be acceptable to confirm no CGT is payable / taxable. However if a loss is to be reported and carried forward greater diligence will be needed.
     
  10. Mike Gerard

    Mike Gerard Member

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    Thank you both...much appreciated.