Beneficiaries who inherit a property need to be aware of the various Capital Gains Tax (CGT) implications associated with owning and selling an inherited property.
When someone passes away and if the property was only used as a principle place of residence, generally CGT doesn’t apply to the inherited asset. However, it may apply when you later sell or otherwise dispose of the asset, so you need to be aware of the implications of CGT.
CGT when a property passes
Capital gain or loss is generally disregarded when a property passes:
- to the deceased person’s executor or other legal personal representative
- to the deceased person’s beneficiary – such as next of kin or a person named in the will
- from the deceased person’s legal personal representative to a beneficiary.
The exception is if the property passes from the deceased to a tax-advantaged entity such as a charity or superfund trustee, or foreign resident. In this case CGT may apply.
The degree of CGT
If you inherit a dwelling or other property on or after 20 September 1985 (when CGT started) and later sell or otherwise dispose of it, capital gains tax may apply. The degree to which CGT applies depends on:
- when the deceased person acquired the property
- when they died as you become the beneficiary on the day they died
- whether the property has been used for income-producing purposes.
CGT may apply if the deceased person’s legal personal representative sells a property as part of winding up their estate.
You will need to make sure you have records for all the above including any relevant costs incurred by you and the previous owner or their trustee or executor.
If a dwelling is inherited it is taken as market value at the date of death, if a valuation is completed you will need to get a copy of this to keep.
Individuals can avoid paying CGT if the property was the deceased person’s main residence and the sale is completed within two years of the date of the deceased person’s death.
There are many CGT implications when inheriting and selling a property which need to be taken into consideration. For any capital gains tax advice tailored to your specific situation please contact our tax advisers.