Oftentimes, a person will occupy their home until they pass away. In these instances, the dwelling can then be directed by the Will to be inherited or sold, with the proceeds from the sale being distributed in accordance with the wishes of the deceased. But what happens when a property is inherited rather than sold?
Inherited Property and Capital Gains Tax
When a property is inherited the person inheriting the property does not pay capital gains tax upon receiving the property. Capital gains tax is only assessed when a property is actually sold. But, with inherited property there are different tax rules and implications, which are somewhat dependent upon when the property was purchased by the deceased and when it was inherited by the beneficiary.
Joint Tenants
If you are a joint tenant with the deceased and the property transfers to you via their Will, you will not pay capital gains tax on the inheritance of their share of the property.
Tenants in Common
However, it is a bit different if you are a tenant in common with the deceased. In this instance, because the deceased outright owns their share of the dwelling, it can pass either by their will to a new beneficiary or be sold. If it passes to a new beneficiary and the beneficiary is considering selling the property, the rules below will apply and it is imperative the seller consult with a solicitor prior to the sale of the property to discuss the implications of paying capital gains tax.
Determination of Capital Gains Tax
There are three possibilities that cover when a person who inherits a property does, or does not, pay capital gains tax upon selling said property.
Purchase and Transfer of Property Prior to 20th September, 1985.
1) The first determining factor is the easiest of the three. If the deceased purchased the property and died prior to the beginning of the assessing of capital gains tax on 20th September, 1985 the beneficiary of the property does not pay capital gains tax should they sell the property in the future. Under these circumstances the seller of the property may only be liable for additional taxes on any major improvements made to the property after the inception of the capital gains tax law.
Purchase of Property Before 20th September, 1985 but Death and Transfer of Property Subsequent to 20th September, 1985.
2) The second manner in which capital gains tax can be avoided is if the person purchased the property before the capital gains tax took effect, but died after 20th September, 1985. However, to be exempt from paying capital gains tax on a property that was inherited under these conditions, requires that the beneficiary of the property meet one of two very specific conditions. Those conditions are;
a. The beneficiary of the property sells the property within two years of the death of the previous owner. This exemption applies even if the recipient of the property lived in it during this time period or rented it for income purposes or;
b. If the home was occupied from the date of death of the owner by either the spouse of the deceased, by someone else the will entitled to live in the home, or by yourself as the beneficiary of the home. For this exemption to apply, the home cannot have been used to generate any form of income.
Determining Capital Gains Tax on a Dwelling Purchased After 20th September, 1985
The next set of factors applies to a home purchased after the capital gains tax laws came into existence. This scenario is ruled by the dates of 20th September, 1985 and 20th August, 1996.
Purchase of Property on or after 20th September, 1985 but transferred via death to the beneficiary before 20th August, 1996.
Under these date rules, you can avoid capital gains tax if you meet the following;
- Condition 2(b) as noted above and
- The deceased used the home as their main residence from the date of purchase until their date of death and
- The deceased never used the property as a source of income.
Purchase of Property on or after 20th September,1985 but transferred via death to the beneficiary after 20th August, 1996.
Under these date rules, you can avoid capital gains tax if you meet the following;
- Either condition 1 or condition 2 as noted above and
- The deceased used the home as their main residence from the date of purchase until their date of death and
- The deceased never used the property as a source of income.
If you do not meet any of the conditions described herein, you may be liable to capital gains taxes on the sale of an inherited property. As this is a legal situation that can be quite complicated, it is always highly encouraged that you speak with a solicitor who specialises in the sale of inherited property before taking any action.
In the event that you find yourself in need of assistance, please contact the law offices of Owen Hodge Lawyers. At Owen Hodge, we are always happy to assist clients in understanding the full ramifications of any and all of your legal needs. Please feel free to call us at your earliest convenience to schedule a consultation at 1800 770 780.