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Inheriting Property: Don’t Let Taxes Take You by Surprise

Updated: Oct 18

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Understanding the tax implications is crucial when it comes to estate planning, handling an inheritance, or managing business succession. Learn the crucial tax implications of inheriting property to steer clear of any costly surprises. Arm yourself with the essential knowledge to safeguard your financial future.


Inheriting Cash

If you inherit cash from an estate, especially when it’s in Australian dollars (AUD), there usually aren’t any direct tax concerns. This is one of the simpler parts of inheritance from a tax perspective.


Inheriting Other Assets

When ownership of an asset like property or shares transfers upon death, this normally triggers a capital gains tax (CGT) event. However, the tax rules provide some relief under certain conditions. The basic rule is that a capital gain or loss triggered by a death is disregarded unless the asset is transferred to one of the following:

  • An exempt entity (although there are some exceptions to this where the entity is a charity with deductible gift recipient status);


  • The trustee of a complying superannuation fund; or


  • A foreign entity and the asset are not classified as taxable Australian property.

The exemption applies if the asset passes to the deceased’s legal personal representative (i.e., executor) or to a beneficiary of the estate who is not one of the entities listed above. However, you’ll need to be aware of potential tax consequences when you sell the asset later.


Inheriting Shares


If you inherit shares, the tax outcome can vary based on factors like when the shares were bought and your loved one’s residency status at the time of their death.


  • Post-CGT shares: If the shares were bought after 20 September 1985, the cost base is the original purchase price. For example, if your mother bought BHP shares in 1997 for $17.82, this is the value used when calculating capital gains when you sell them.


  • Pre-CGT shares: If the shares were acquired before the introduction of CGT, their value is reset to the market price at the time of death. So, if the shares were worth $45.96 when your mother passed in 2024, any future capital gain is calculated from that value.


If your loved one was not an Australian resident at the time of their death, the cost base is typically set at the shares' market value on the date of their passing.


Inheriting Property


When you inherit a residential property, for tax purposes, you are considered to have acquired the property on the date of the previous owner's death. Normally, you will inherit the cost base of the property. However, if the property was the main residence of the deceased, there are special rules that may allow for a Capital Gains Tax (CGT) exemption.

If the property was the deceased's main residence and wasn’t used to generate income (e.g., not rented out), the estate or beneficiary might be eligible for a full CGT exemption, provided one of the following conditions is met:


  • The house is disposed of within two years of the date of death; or 


  • The dwelling was the main residence of one or more of the following people from the date of death until the dwelling has been disposed of: 


    • The spouse of the deceased (unless they were separated); 


    • An individual who had a right to occupy the dwelling under the deceased’s will; or


    • The beneficiary who is disposing of the dwelling. 


For example, if your father’s home qualifies for the full main residence exemption and you sell it within two years, no CGT will apply. But if you hold onto the property for 10 years, you’ll need to calculate CGT based on how it was used after his passing.


If your father did not live on the property just before he died, it might still be possible to apply for the full exemption if your father chose to continue treating the home as his main residence under the 'absence rule'. For example, if he lived in a retirement village for a few years but maintained the property as his main residence for CGT purposes, even if it was rented out.


If your father was not an Australian resident for tax purposes when he died, the cost base for CGT purposes will generally be based on the purchase price he paid if he acquired it post-CGT.


Inheriting foreign property


For Australian residents, who have inherited a foreign property or asset from a non-resident individual passed away, the cost base is typically considered to be the market value at the time of death. For example, if you inherited a house from your uncle in the UK, the cost base is likely to be the value of the house at the date of his death.


If you make a profit from selling this asset, you need to check if you're eligible for the CGT discount, which may be less than 50%. If you're also taxed for the gain in another country, you might be able to use a tax offset to lower the amount of tax you owe in Australia.


 

Dealing with the tax implications of an inheritance can be complicated, and alterations in tax laws or asset values may have a significant impact on the distribution of an estate in the future.


If you have any questions about estate planning or inheritance taxes, please don't hesitate to contact our team for professional advice. We will keep abreast of the latest legal and tax regulations to offer you timely and accurate guidance.


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