Main Residence: Inheritance and Capital Gains Tax

According to the Australian Tax Law, Capital Gains Tax (CGT) does not apply if a beneficiary inherits a dwelling (or any asset in the estate of a deceased) when it is acquired. However, CGT may apply if the asset is disposed off later, such as if you sell the dwelling you inherited from the deceased.

If an inherited dwelling is sold, there are special rules, pertaining to the main residence exemption. Death and inheritance is a complex case, especially when it comes to taxes. Issues must be resolved on a case by case basis. Let’s look at one such case:

If a dwelling was used as a main residence, and the owner of the residence passes away, the estate is inherited by a beneficiary such as the next of kin. In this case, what would be the beneficiary’s tax position if he were to sell the property eventually? Would he qualify for the full main residence exemption?

We’ve created the following info graphic to help you understand the facts of the case:

The beneficiary/next of kin can qualify for the full main residence exemption on the sale of this dwelling only if:

  • The dwelling was acquired by the deceased before 20 September 1985 (pre-CGT assets).
  • Or on or after 20 September 1985 (post-CGT assets), and it was the deceased’s main residence at time of death without being used for income-earning purposes.

And the dwelling was sold off:

  • Within two years of the death of the deceased – regardless of whether it was used as a main residence after the death).
  • Or it was sold off at any time, but occupied as a main residence by the beneficiary/next of kin after the death.

Considering these conditions, since in the example case, the next of kin did not live in the dwelling i.e. did not make it his main residence after the owner’s death, he does not qualify for the full main residence exemption after selling the dwelling.

Similarly, there are rules attached to whether he will qualify for the partial main residence exemption. The situation of the exemption from the CGT depends on:

  • When the property/dwelling was acquired
  • Date of person’s death
  • Whether the property was used to produce income
  • Whether the deceased was an Australian resident at time of death.

If the beneficiary is exempt, or partially exempt, it is important to know the cost base of the dwelling to figure out the capital gain. The cost base can be the value of the property on acquisition (in the example case: 200K) or the value on death (in the example case: 300K). depending on the circumstances.

With such complicated cases, it is best to refer to a registered tax agent and discuss the situation in detail. It will be beneficial in terms of understanding and making the most of your tax situation. If you have any questions or concerns, Solution In will be happy to help.

To know more about us, check out our website. To book an appointment, contact us on info@solutionin.com.au or 0405012345.

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