Time to read : 7 Minutes
This is a great question I often get asked. It really requires advice from a professional as there are so many ins and outs – as you’ll soon see.
My guide is designed to help you better understand the topic and the different scenarios. Let’s jump in.
What are the tax implications of inheriting an investment property?
Although death may trigger a transfer of property, there is generally no Capital Gains Tax (CGT) due as a result. Instead, there is usually an automatic CGT roll-over relief on the disposal of the property when there’s a death. This means that any capital gain is overlooked on death and is only charged when the estate or the beneficiary disposes of the asset.
This applies to transfers:
from the deceased to the executor or from the deceased direct to a beneficiary of the deceased estate
from the executor to a beneficiary
from the deceased directly to the beneficiary where an asset is held under a joint tenancy.
CGT arises when the executor or beneficiary later disposes of the inherited property. In other words, death defers a capital gain to the ultimate disposal of the property by the estate or the beneficiary.
Here’s a summary of the CGT implications when there's a death:
Event/asset | Capital Gains Tax (CGT) implication |
|---|---|
Death | No direct CGT consequences for the deceased unless a post-CGT asset passes to an exempt entity, a complying superannuation fund or, in some circumstances, a non-resident. |
Assets owned at death | Pre-CGT assets are acquired by the executor at the date of death (DOD) for market value at DOD. Post-CGT assets are acquired at DOD for the deceased’s cost base (the original acquisition cost to the deceased). |
Assets pass from estate to beneficiary | No CGT implications for the executor. Beneficiaries inherit the same cost base and acquisition date as the executor. |
Death of joint tenant | The surviving joint tenant generally acquires the deceased’s interest on the same basis as it passed to them via the executor, even though they acquired it directly as the surviving joint tenant. |
Assets acquired by the estate post-death | Where assets are acquired and disposed of by the estate post-death, the CGT rollover does not apply. Normal CGT rules apply unless the acquisition is done to satisfy a general legacy, in which case no CGT is due. |
Main residence of the deceased | Full or partial main residence exemption available when disposed of by estate or beneficiaries. (This is explained in detail below). |
Note: a post-CGT asset is one acquired on or after 20 September 1985, the date CGT was introduced.
Disposing of a property generally means to sell it but may also mean transferring it to another person.
What are the Capital Gains Tax acquisition rules?
When the property is transferred from the deceased to either the estate or the beneficiary, special rules apply as to what the cost of the asset will be to the estate or beneficiary – a 50% discount would apply to assets held for 12 months.
The 12-month period starts from the deemed acquisition date for the estate or beneficiary.
Important tip: always remember that assets must be held for 12 months before the discount applies.
Here are the rules:
Type of asset to the deceased | Cost base to the estate/beneficiary | Acquisition date of the asset for the estate/beneficiary | Start date for 12 month period for 50% discount |
|---|---|---|---|
1 Any post-CGT asset (eg investment properties) other than those covered in point 2 | The deceased’s cost base (the original acquisition cost to the deceased) | Deceased’s date of death | From the deceased’s acquisition date |
A post-CGT dwelling that was the deceased’s main residence just before death and was not being used to produce income (eg the family home) | Market value at the date of death | Deceased’s date of death | From the deceased’s acquisition date |
3 Any asset acquired pre-CGT by the deceased | Market value at the date of death | Deceased’s date of death | Deceased’s date of death |
What if there are challenges or variations to the will?
CGT roll-over still applies where:
The beneficiaries agree that the deceased’s assets should be distributed in a way other than that specified in the will.
A court order varies the will.
Interested parties come to an agreement evidenced by a deed of arrangement.
What about gifts on death to exempt entities and non-resident beneficiaries?
CGT roll-over does not apply to so-called tax advantaged beneficiaries. These are entities which would pay no or reduced CGT on an ultimate disposal and so tax is applied at the time of the gift. Examples include gifts paid to:
income tax exempt entities such as a church, public hospital, non-profit sporting club or charity
trustees of a complying super fund
a non-resident (for example someone living overseas) where the asset is not ‘Taxable Australian Property’ (such as an overseas property).
If the property passes to one of these, CGT will apply to treat the deceased as if they had sold the asset to the beneficiary at market value just before death, crystallising a gain in the deceased’s date of death tax return.
The CGT liability that arises is met from the deceased estate prior to determining the amounts available to the other beneficiaries so the overall inheritance amount is reduced.
Important tip: to avoid this tax trap, consider leaving non-CGT assets (like cash) to the non-resident beneficiaries and CGT assets to the resident beneficiaries.
What would be the tax implications of inheriting the family home?
The family home is typically the biggest and most important purchase anybody will ever acquire. And as life’s journey ends, it will often be the biggest single asset the deceased owned.
There may be a surviving partner still living in the home, or perhaps there are children or grandchildren who receive it through the will.
The basic tax rule is that when an individual dies, their home forms part of their deceased estate unless the property passes to a surviving joint tenant, typically their spouse or partner.
The executor of the deceased estate may sell the deceased’s property, including the home, during the course of administering the estate. Alternatively, a beneficiary of the deceased estate may inherit the home and either sell it themselves at a later date or use it as their own main residence.
Typically, the main residence exemption is extended to include an executor or beneficiary of a deceased estate. This means that either the administrator of the estate on selling the home, or the beneficiary on ultimately disposing of the house, will not pay CGT on the disposal.
While this is the general rule, there are exceptions. To qualify for the extension of the main residence exemption, the following conditions must be met.
If the asset is:
a house acquired by the deceased pre-CGT or
a house acquired by the deceased post-CGT and just before death the house was:
the main residence of the deceased and
was not being used to produce taxable income.
AND one of the following applies:
the house is disposed of within two years of the date of death or
from the date of death until the date of disposal of the house, the house was the main residence of:
the spouse or partner of the deceased
an individual with a right to occupy the house under the will
an individual to whom ownership of the house passed under the will.
There will be NO capital gain when the house is disposed.
Important tip: If the house does not become the main residence of the individuals listed above for the entire period, then the trustee or beneficiary’s ownership must end within two years of the deceased’s death to get the CGT exemption.
In practice, this means that the settlement (and not just the entry into a contract of sale) must happen within two years of the date of death.
This timing restriction can be a problem where the winding up of the estate is a drawn-out process and the beneficiary, although entitled under the will to the property, is unable to settle on the disposal within the two-year limit.
The ATO recently announced a limited form of discretion to allow the two-year period to be extended in certain circumstances.
Example
Joan owns a house that she bought on 12 June 2009, which was her main residence throughout her period of ownership. She dies on 12 March 2022, leaving the property to her grandson John in her will.
John sells the property. The contract is signed on 15 May 2024. This is the deemed date of disposal for tax purposes. The property is settled on 13 August 2024.
John does not own any other real estate during the period of his ownership of the inherited property.
Scenario 1
John rents out the property from the time that he obtains legal ownership of it until the disposal.
John would not be eligible for the main residence exemption as the property did not become his main residence and his ownership interest ended more than two years after Joan’s death.
Scenario 2
John moves into the property soon after Joan’s death and lives there until the settlement occurs.
During her life, Joan had never derived any taxable income from the property.
John can access the main residence exemption in respect of the whole capital gain.
Scenario 3
John moves into the property soon after Joan’s death and lives there until the settlement occurs.
In the two years prior to her death, Joan had rented out one bedroom to a student at a nearby university. The rental income was taxable. The student moved out when the property was passed to John.
John cannot access the whole main residence exemption because Joan had derived assessable income from the property just prior to her death, though he may be eligible for an exemption from part of the gain.
What about land tax?
When someone dies, their home will be exempt from land tax, either:
until ownership is transferred to someone else, apart from their personal representative or a beneficiary of the estate, or
for two years after the date of death.
If someone still lives in the property, it’s exempt from land tax if the occupant:
is allowed to live there according to the legal will of the person who has died, or
isn’t a tenant but occupied the property when the owner died and has been given permission to continue living in the home by the personal representative of the person who died.
Land tax will arise where the property is transferred into a company or trust by the beneficiary of the will.
Bottom line:
The rules around the tax implications of inheriting a property are complex – especially when there are factors such as who’s living in the property and who may be included in the will.
If you have parents that own property – a residence such as a family home or an investment property – it could be worth having a conversation and preparing for the future.
After all, the last thing you’ll want to inherit is a tax bill.
Go deeper:
Do you know what the tax implications are for gifting children?
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