People who find out they are inheriting an investment property have important decisions to make. In this article we look at two of the options – to keep using the property as an investment before selling it or to live in it before selling it.
Each scenario has its own unique factors to consider, including taxation implications.
Scenario one: Continue to use property as an investment before selling
This could be a good way to either grow an existing investment property portfolio or get a step on the property investing ladder. But it’s important to understand the tax implications.
Firstly, any rental income received from the property will be taxable income for the new owner. Tax deductions associated with the property, such as interest repayments, insurances, council rates, maintenance costs and property management fees, will also be deductible for the new owner.
To claim the costs associated with the property at tax time, property owners are required to keep records of the costs. But how do they claim depreciation, which doesn’t require a financial outlay?
Depreciation is the natural wear and tear of property and assets over time. Owners of income-producing properties can claim this depreciation as a tax deduction each financial year. To do this, they need a tax depreciation schedule prepared by a specialist quantity surveyor. This is a report that outlines every depreciable item of the property, which an accountant uses to determine the depreciation deduction.
The new owner also needs to be aware of the capital gains tax (CGT) implications at the time of sale. Paying CGT when inheriting an investment property is complicated and largely depends on how the property was used and how long the new owner held the property before it was sold. These are the main contributing factors of whether the property will be fully or partially CGT exempt, or not at all.
If the property was purchased before 20 September 1985 (the date that CGT was introduced) and the new owner sold it within two years, then the property is fully exempt from CGT.
It gets slightly more complicated where a property was purchased after this date.
If the property was purchased after 20 September 1985 , and if the new owner acquired the investment property after 20 August 1996, then a full CGT exemption won’t be available. However, they may be able to get a partial exemption and the individual’s accountant will assess this when it comes time to calculate any CGT.
Scenario two: Live in the property before selling it
The first thing to know in this scenario is that a current fixed lease must be honoured. This means the present tenant can stay at the property until the lease period ends or an earlier date is agreed to by all parties.
It’s important that the new owner remembers that while the property is still leased, they can claim tax deductions even if it’s not for a full financial year. Pro-rata deductions can be applied to any type of tax deduction including interest repayments and depreciation.
If the property is the new owner’s main residence prior to sale, they will be partially CGT exempt. The only scenario where a full CGT exemption would apply would be if the property was the previous owner’s main residence and it hadn’t been rented out.
For more information on how to make the most out of an inherited investment property, contact BMT on 1300 728 726 or Request a Quote.