In its own right, capital gains tax (CGT) can be incredibly complex. If you happen to be the beneficiary of property as part of a deceased estate, you may be wondering whether you’ll need to pay CGT if you choose to sell it down the track.
As with many questions concerning tax law, it depends. But let's start at the beginning.
What is capital gains tax?
Capital gains tax is the tax paid on any profit you make from selling an asset, generally a property, shares, or other investment.
To pay the tax, you must first make a 'capital gain' - in other words, sell the asset for more money than what you paid for it.
Any capital gain must reported to the ATO and added to your taxable income for the year. It will be taxed at your usual marginal tax rate. CGT was introduced in Australia on 20 September 1985, and anything purchased before this date is free from the tax.
Your family home is typically exempt from CGT, as long as you’ve never used it to operate a business or to generate a rental income. Those distinctions are also important when it comes to deceased estates.
What is a deceased estate?
A deceased estate refers to all the property, assets, liabilities, and debts held by a person who has died.
Upon their death, the deceased estate passes to their legal representative, who distributes it as set out in a will, or passes it on directly to their beneficiaries.
Beneficiaries are considered to have taken ownership from the date of the person’s death.
Do you pay capital gains tax on a deceased estate?
You are not required to pay CGT on a deceased estate when it is passed to you. However, you may have to pay CGT at a later date when you sell the estate.
There are also separate rules around CGT for deceased estates regarding shares and managed funds - but we'll just stick to property here.
First up, the inherited property must include a dwelling and you must sell them together. Generally, you can't get a CGT exemption for land or a structure you sell separately from the dwelling.
There are also different rules if you are a foreign resident, or the deceased was a foreign resident (see below).
You'll need to work through the following questions to find out if your inherited property is exempt from CGT.
(Note: the links below will take you directly to the relevant ATO website for definitions and additional information.)
Savings.com.au’s two cents
As you're about to see, CGT and deceased estates can be complicated.
If in doubt, always seek the services of a solicitor and/or a professional tax accountant to be sure of your obligations and that you are paying the correct amount of tax.
It can also be wise to engage professional advice when you inherit a property - or other assets - to ensure you understand the financial and tax implications. Such advice can help you plan how to make the most of your inheritance and avoid missteps that may prove costly down the track.
Work out if your inherited property is CGT exempt
Q1. Did the deceased die before CGT started on 20 September 1985?
Yes: Property is fully exempt (however, any major property improvements or additions you make on or after 20 September 1985 may be subject to CGT)
No: Go to question 2
Q2. Did the deceased acquire the property before 20 September 1985?
Yes: Go to question 6
No: Go to question 3
Q3. Did you inherit the property after 20 August 1996?
Yes: go to question 5
No: go to question 4
4. From the time the deceased acquired the property until their death, was the property their main residence and not used to produce income?
Yes: go to question 7
No: property is not fully exempt. You may qualify for a partial exemption
5. Just before the deceased died, was the property their main residence and not used to produce income?
Yes: go to question 6
No: property is not fully exempt. You may qualify for a partial exemption
6. Did you dispose of the property within 2 years?
See: Disposal within 2 years (below)
Yes: property is fully exempt
No: go to question 7
7. From the time the deceased died, was the property used only as the main residence of at least one of the following people:
- the spouse of the deceased immediately before their death (but not a spouse who was permanently separated from the deceased)
- a person who has a right to occupy the property under the deceased's will
- you, as a beneficiary, if you dispose of the property as a beneficiary?
See: Main residence while you own property.
Yes: property is fully exempt
No: property is not fully exempt (you may qualify for a partial exemption)
Disposal within two years
You'll meet this requirement if you dispose of the property under a contract that settles within two years of the deceased's death.
It doesn't matter whether you used the property as your main residence or to produced income during that two-year period.
You can also extend the two-year period if disposal of the property is delayed by exceptional circumstances outside your control.
Main residence while you own property
You meet this requirement if, from the deceased's death until you dispose of the property, both of the following are true:
- the property is not used to produce income
- the property is the main residence of at least one of the following people:
- the person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased)
- a person who has a right to occupy the property under the deceased's will
- you, as a beneficiary, if you dispose of the property as a beneficiary.
The property can continue to be the main residence of one of the above people if they choose to treat it as their main residence (even if they have stopped living in it).
A property is considered to be your main residence from the time you acquire it, if you move in as soon as practicable after that time.
If your property is not fully exempt
If your property is not or only partially exempt from CGT, to work out your capital gain, you need to know its cost base.
There are several variables to work out the cost base of an inherited asset, depending on:
when you acquired it
- any eligible expenses you may be able to include in the cost base calculation
- any legal costs you may incur
- whether you choose to index the cost base for inflation (only applies as an option if the deceased died before 21 September 1999)
- whether you choose to claim the CGT discount. (This is the only option available if the deceased died on or after 21 September 1999)
If your property is partially exempt, you need to work out the proportion of your property that is exempt.
Foreign residents and inherited property
When you inherit Australian residential property:
if the former owner of the property was a foreign resident for more than six years at the time of their death, you can't claim the main residence exemption for the period they owned it
if you have been a foreign resident for more than six years when you sell or dispose of the property, you can't claim the main residence exemption for the period you owned it
if you have been a foreign resident for six years or less when you sell or dispose of the property, to claim the main residence exemption you must satisfy the life events test.
If you are not entitled to the main residence exemption, CGT will apply when you sell or dispose of the property.