The transfer of property when a person dies can be difficult, doubly so when you throw tax into the mix.
In its own right capital gains tax (CGT) can be incredibly complex, and even more so with all the separate scenarios associated with a deceased estate.
We’ve broken down the jargon from the Australian Tax Office (ATO) to explain when you may have to pay CGT on a deceased estate.
Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.
Smart Booster Home Loan
- Discount variable for 1 year <=80% LVR
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Monthly repayments: $1,476
- Discount variable for 1 year
- No ongoing fees
- Unlimited redraw facility
Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
What is capital gains tax?
Capital gain is essentially the profit you make from an investment and occurs when you sell this investment and make more money from the sale than what you paid for it.
Any capital gain is reported to the ATO, added to your taxable income to the year, and taxed at whatever tax bracket you fall into.
CGT was introduced on 20 September 1985, a date you’ll see frequently throughout this article.
Your family home is typically exempt from CGT, as long as you’ve never used it to run a business or rented it out. 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 a person who has died holds.
Upon the person’s death, the deceased estate passes to their legal representative, who distributes it as set out in the will, or directly to their beneficiaries.
Beneficiaries are considered to have taken ownership from the date of the person’s death who bequeathed it to them.
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 which we won’t get into here - we’ll just stick to property.
The ATO outlines a number of scenarios where you may be exempt from paying CGT when you inherit a property:
Deceased died before CGT introduction
If the deceased died before 20 September 1985 you are exempt from paying CGT when you sell the property.
However, any substantial renovations you make after this date may be subject to CGT.
Deceased acquired property before CGT introduction and died on or after this date
In this scenario, meeting one of two conditions will mean you’re exempt from CGT:
Condition 1: If the dwelling was sold within two years of when you took ownership. You can also apply to extend this period if factors beyond your control prevented you from selling the property.
Condition 2: If you do not use the home to produce income and it was the main residence of the deceased’s spouse at their time of death, a person who was permitted to live in the property as set out in the will, or a beneficiary who also disposes of the property.
Deceased acquired property on or after CGT introduction
Any capital loss or gain is disregarded when you sell the property if either of the following applies:
You gain ownership of the property on or before 20 August 1996 and condition 2 is met (see above), and the deceased used the property as their main residence from when they bought it to when they died and didn’t gain income from it
You gain ownership of the property after 20 August 1996 and condition 1 and 2 is met (see above), and the deceased was living in the property when they died and didn’t gain income from it.
What happens if you need to pay CGT on a deceased estate?
If you’re not exempt for CGT, based on the above scenarios, you will have to pay it.
This is done by figuring out the cost base of the property. The cost base is the market value of the home when the deceased purchased it, or when they died, depending on the circumstances.
Additionally, if the property was bought before 21 September 1999 you’ll need to use the indexation method to take into account inflation.
Calculating CGT can be complicated so we won’t get into it now, but it’s important you understand how to do it.
Tax-advantaged entities and foreign residents inheriting deceased estates
As mentioned above, you are not required to pay CGT on a deceased estate at the time it is passed to you. This is not the case for tax-advantaged entities and foreign residents.
A tax-advantaged entity is defined as a tax-exempt entity such a church or charity, or the trustee of a superannuation fund.
When these groups inherit property they are required to pay CGT if there is capital gain based on the current market value of the property.
Inheriting property from a foreign resident
Whether you pay CGT if you inherit property from a foreign resident mostly comes down to the deceased’s circumstances.
You will be exempt from CGT if you qualify for the main residence exemption. A person can only qualify for this if the deceased foreign resident passed the life events test.
To satisfy this test, you must be a foreign resident for tax purposes for a continuous period of six years or less and one of the following must have occurred:
You, your spouse, or your child under 18, must have had a terminal medical condition
Your spouse, or your child, must have died
Your home must have been sold as a result of a divorce or separation.
If you acquire a property from a foreign resident, you can claim exemption from CGT provided:
They had been a foreign resident for less than six years
They satisfied the life events test
Condition 1 and 2 are satisfied
It’s unlikely you will be exempt from CGT if you inherit a property a foreign resident owned for more than six years.
Keeping comprehensive records is extremely important when you inherit a dwelling, to ensure you don’t leave yourself open to any penalties from the ATO should they scrutinise you.
According to the ATO, you should:
Keep a record of the market value of the property when the deceased died, and any costs you incurred from the legal personal representative
Have the legal personal representative value the property and give you a copy of the valuation report or have it valued yourself.
Savings.com.au’s two cents
As you can see, CGT and deceased estates are incredibly complicated.
The best course of action is likely to figure out what scenario you slot into and focus on that one, rather than trying to understand all the ones the ATO have come up with.
At a time when you may be grieving the loss of the loved one, it may be worth consulting a finance professional to help you through this difficult period.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
- If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may inﬂuence the cost of the loan.
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