The capital gains tax implications of inheriting an investment property

BMT team — Sun, 25 Feb 2024 04:17:36 +0000

Property inheritance is the transfer of property to an heir or beneficiary upon the death of an owner. There are various tax implications triggered when inheriting an investment property, particularly where capital gains tax (CGT) is concerned. In the instance that an inherited property is sold immediately, the tax implications will be determined by factors around the date of acquisition and the type of use of the property by the previous owner from whom it was inherited. In this article BMT outlines the CGT implications of four different scenarios including: inheriting a property that was a main residence and selling it immediately inheriting an investment property and selling it immediately inheriting an investment property and living in inheriting an investment property and keeping it as an investment property Scenario 1: Inheriting a property that was a main residence and selling it immediately Let’s say that a beneficiary has inherited a property from a deceased family member and decides to sell the property rather than keep it. Will capital gains tax apply? Well, that will depend on the purpose of the property and the date the deceased acquired the property. The property will be exempt from CGT if: • the property was the main dwelling (i.e., was not used to produce income) from the time the deceased acquired the property until their death, and is sold by the beneficiary within two years • from the time the deceased died, the property was used only as the main residence of at least one of the following people: – the spouse of the deceased immediately before their death (but not a spouse who was permanently separated from the deceased) – a person who has a right to occupy the property under the deceased’s will – the beneficiary, if they dispose of the property as a beneficiary. If the property was used to produce income, i.e., it was an investment property, the property is not fully exempt. However, the beneficiary could qualify for a partial exemption. Scenario 2: Inheriting an investment property and selling it immediately Let’s now say a beneficiary has inherited a property which was used to produce an income – and never as a main residence. In this scenario the full CGT applies when selling. But if the inherited property was used as both a main residence and as an investment property, then a partial CGT exemption may apply. The partial exemption is calculated as follows: Capital gain (A) × non-main residence days (B) ÷ total days (C) = capital gain or loss (D) ExampleSally inherited her grandmother’s rental property which she sold immediately, resulting in a capital gain of $400,000 (A). The house was owned by Sally’s grandmother for twenty years (C), twelve (B) of which was used to produce an income. Sally will need to pay CGT on the time the property was income producing but will be eligible for an exemption for the time it was a main residence and will qualify for the fifty per cent discount as it was owned for longer than twelve months.The capital gain is calculated as follows: $400,000 × 4,380 days ÷ 7,300 days = $240,000 A B C DThe fifty per cent discount is calculated as follows: $240,000 x 50% = $120,000 A capital gain of $120,000 is then taxed at Sally’s marginal tax rate. In instances where an inherited property was used both as a rental and a main residence, but was the deceased’s main residence right before their death and disposed of within two years, the property is exempt from CGT. For inherited properties that were previously inherited a different tax implication applies. The formula for calculating the partial main residence exemption is adjusted if the deceased also acquired the property on or after 20 September 1985 as a beneficiary (or trustee) of a deceased estate. The main residence exemption is calculated according to the number of days the property was the main residence of the current owner and the previous beneficiaries. It’s important to note the main residence exemption is generally not available to foreign residents or if the deceased was a foreign resident. Scenario 3: Inheriting an investment property and living in it There are partial CGT exemptions available to people who inherit investment properties and live in them as their main residence. A person who inherits an investment property can claim the days the property was not used to produce an income under the main residence exemption in the event of selling. ExampleTom inherited a property from his father (James) which James used as a rental property for eight years. Tom lived in the property for ten years after taking ownership, which makes it his main residence. He is therefore eligible for the main residence exemption. Tom decides to sell the property after ten years of living in it, resulting in a capital gain of $350,000.The main residence exemption is calculated as follows: Capital gain × non-main residence days ÷ total days = capital gain or loss$350,000 × 2,920 ÷ 6,570 = $155,555 As Tom owned the property for longer than twelve months, he is also entitled to the fifty per cent discount. $155,555 x 50% = $77,777.50 In this scenario Tom will pay CGT on the $77,777.50 at his marginal tax rate instead of $350,000 under the main residence exemption and the fifty per cent discount. Scenario 4: Inheriting an investment property and keeping it as an investment property In scenarios where the new owner wants to continue using their inherited property as a rental property, a different set of tax implications and benefits apply. If the property was used as a main residence at any stage of ownership, it may be eligible for a partial exemption. The fifty per cent CGT discount will also apply in this scenario if the property is owned for […]

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Here is what you need to know about inheriting an investment property

BMT team — Mon, 11 Oct 2021 22:44:08 +0000

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.

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The capital gains tax implications of inheriting an investment property

Here is what you need to know about inheriting an investment property