How Capital Gains Tax Applies to a Deceased’s Residence
When someone dies owning their home in Australia, selling that dwelling can often be completely free of capital gains tax (CGT) (subject to meeting certain criteria under section 118-195 of the Income Tax Assessment Act 1997 (ITAA)). The application of CGT to a property turns on matters such as:
- when the deceased acquired the home (pre or post CGT application – September 1985);
- whether it was their main residence;
- whether the dwelling was used to produce income (applies to properties where it was used to produce income after 20 August 1996);
These issues need to be carefully considered during the administration of the estate (usually resulting in the sale of any real property belonging to the deceased) to determine whether any CGT exemptions (partial or full) may apply to the property being sold.
If the deceased bought the property before 20 September 1985, any CGT is usually ignored if the property is sold within two years of death or if it is continuously used as the main residence of an eligible person (such as a spouse, beneficiary or someone with a right to live there) and not used to produce income. For homes acquired on or after that date, extra conditions apply: the dwelling generally must have been the deceased’s main residence just before death and not rented out and then either sold within two years or continuously used as the main residence by an eligible person without being an investment property. There are exceptions to the two-year limit by which the property must be disposed (sold and settled or transferred pursuant to the terms of a Will). However, these exceptions are at the Income Tax Commissioner’s discretion or via the Safe-harbour principals and can include estate disputes which delay that distribution.
Missing these conditions can result in only a partial exemption being applicable or trigger CGT on the increase in value from the relevant cost base to the sale price. When assessing CGT consequences on a deceased’s residence, it is imperative to understand when and how the property was acquired, how it was used, how it was managed and how it was disposed of after death. As an executor / administrator of a deceased estate, it is imperative to ensure that you obtain the correct legal and accounting advice to identify whether an estate property may be subject to CGT.
Tailored advice is essential in this regard. The Wills and Estates Team at Tisher Liner FC Law can assist with all your estate administration issues and work with your own accountant or a panel of qualified accountants, that understand the nuances of estate taxation.