CGT implications when selling an inherited property

Upon inheriting a property via a deceased estate, capital gains tax (CGT) will not arise until the property is subsequently sold by the beneficiary. Furthermore, in many cases, the beneficiary may be entitled to a full or partial exemption from CGT at the time of disposal depending on the specific situation.

Deceased died before 20 September 1985: In this situation, any capital gain achieved from a property a beneficiary acquired before September 1985 will be exempt from CGT as CGT provisions did not commence until after this date.

Deceased died on or after 20 September 1985: If the deceased purchased the dwelling before 20 September 1985, any capital gain or capital loss is disregarded if either of the following conditions apply:

If a full exemption is not available under the two conditions above, the cost base used in any future capital gain calculation will be the market value of the property at the deceased’s date of death as the asset was originally a pre CGT asset. If the deceased purchased the dwelling after 20 September 1985, any capital gain or capital loss is disregarded if either:

1. Condition 2 above is met. For this to apply, the deceased must have used the dwelling as their main residence from the date they acquired it until their death and they must not have used it to produce income. OR
2. One of the conditions 1 or 2 above is met, and the dwelling passed to you as beneficiary or trustee after 20 August 1996, and just before the date the deceased died it was their main residence and was not being used to produce income by the deceased.

Please note: A dwelling can still be regarded as the deceased’s main residence even though they ceased living in it if they or their trustee chose to treat the dwelling as the deceased’s main residence (eg upon moving into an aged care facility). If this is the case, the dwelling can still be regarded as the deceased’s main residence:

• for an indefinite period if the dwelling was not used to produce income after the deceased stopped living in it, or
• for a maximum of six years after they ceased living in it if it was used to produce income after they ceased living in it.

If a full exemption is not available, the cost base used in any future capital gain calculation will generally be the deceased’s cost base (ie the original purchase price of the asset). However, the cost base is the market value of the asset on the day the deceased died if the asset:

• is a property that passed to you after 20 August 1996 (but not as a joint tenant), and just before the deceased died it was their main residence and was not being used to produce income, or
• passed to you as the trustee of a special disability trust.

Part Exemption

If a full exemption is not available, clients may still be entitled to a part exemption from CGT based on the number of days the home was classified as a main residence compared to the total number of days the home was owned.

The amount of capital gain or loss is calculated as follows:

Capital gain or capital loss amount x Non-main residence days divided by Total days

The following examples are provided by the ATO to illustrate how a full or partial exemption works for dwellings acquired via a deceased estate.

Case Study 1: Full Exemption Rodrigo was the sole occupant of a home he bought in April 1990. He has only ever lived in it and not used it to produce income. Rodrigo died in January 2018 and left the house to his son, Petro. Petro rented out the house and then disposed of it 15 months after his father died. Petro is entitled to a full exemption from CGT – condition 1.

Case Study 2: Partial Exemption Vicki bought a house under a contract that settled on 12 February 1995. Vicki used the house solely as a rental property.

When Vicki died on 17 November 1998, the house was inherited by her beneficiary, Lesley.

Lesley lived in the house as her main residence throughout the time she owned it.

Lesley sold the property under a contract that settled on 27 November 2022. She made a capital gain of $400,000.

Lesley cannot claim a full exemption from CGT because Vicki did not use the property as her main residence. However, Lesley is entitled to an exemption for the time she used the house as her main residence.

Vicki owned the house as a rental property for 1,375 days and Lesley lived in the house for 8,777 days. This is a total of 10,152 days. Lesley works out the taxable portion of her capital gain as follows:

Capital gain × non-main residence days ÷ total days = capital gain or loss $400,000 × 1,375 ÷ 10,152 = $54,176

Lesley can use either the CGT discount or indexation to calculate her capital gain, because she:

• is taken to have acquired the property before 21 September 1999
• entered into the contract to sell it after 21 September 1999
• held the property for at least 12 months.

Capital gains tax implications when selling inherited properties is a complex area and specialist tax advice is recommended.

Additionally, the ATO have a step by step tool available to help determine if an inherited property has a full or partial main residence exemption Inherited property and CGT. https://www.ato.gov.au/Individuals/Capital-gains-tax/Inherited-assets-and-capital-gains-tax/Inherited-property-and-CGT/