“In short, if the executor or beneficiaries sell a property that was used solely as a primary residence by the deceased, there is no capital gains tax on the sale as long as it is sold within two years of the owner’s death,” he says.
However, this rule only applies if the house was exclusively the main residence of the deceased and was not rented or otherwise used commercially in the two years after his death, i.e. if income was generated from the property, no matter how large or small get rid of CGT.
According to the ATO, the partial exemption can include real estate that was only considered the main residence for part of the time from acquisition by the deceased to the point of sale. The exempt portion of capital gains can be calculated by dividing the period of primary residence by the total period of ownership. And for real estate acquired by the deceased before September 20, 1985, the relevant period begins on the date of death.
Special circumstances for the sale
While selling a property in the two years following its inheritance is the general rule of thumb for minimizing CGT, an “application for renewal” may be required in certain situations. This means you can sell the property for more than two years after inheriting it with the same CGT status. However, such an extension must be approved by the ATO.
These situations include delays that are beyond your control, such as:
- Ownership of an apartment or a will is called into question
- The complexity of a deceased estate delays the completion of estate administration
- A trustee or beneficiary is unable to take care of the deceased property due to unforeseen or serious personal circumstances occurring during the two year period (e.g., the beneficiary or a family member has a serious illness or injury).
- The processing of a sales contract for the apartment is unexpectedly delayed or fails
- Circumstances beyond the control of the beneficiary or trustee.
Think carefully about the effects of CGT
So what if you’ve missed the two year deadline and don’t have a valid reason to request an extension, or if you choose to keep the property longer? According to Kilkenny, CGT is based on the value and use of the home after the change of ownership. So think carefully before renting it out or hiring it on AirBNB
“If the deceased acquired the property before September 20, 1985, the beneficiary is only subject to capital gains tax – if the property is not used as their primary residence – on capital gains made after the death of the previous owner,” he explains.
However, if the beneficiary continues to use the property as their own primary residence, as the deceased did, then the deceased owner’s exemption will be transferred by CGT. The same applies if the property was used by the deceased exclusively as a main residence up to the date of his death.
“It is then very important for executors and beneficiaries to have a formal valuation of such property at the time of death if it is not sold within two years of the death of the deceased,” notes Kilkenny.
CGT applies when the property is transferred to a tax-privileged entity such as a charity or overseas resident. It is also important to note that unapplied net capital losses of the deceased are not carried over to the beneficiary to offset them with any net capital gains.