Main residence CGT exemption and death

You may have heard of the phrase “nothing is as certain as death and taxes”. This phrase also begs the question of what the consequences will be when death and taxes collide. For example, what will the tax position be if a beneficiary of a deceased estate inherits a dwelling that was used as a main residence by the deceased?

  1. Will such a beneficiary qualify for the full main residence exemption (i.e. also for the period during which the deceased used the dwelling as a main residence) on the eventual sale of the property?
  2. If such a beneficiary does not qualify for the full main residence exemption, will such a beneficiary qualify for the partial main residence exemption?

As always, the answer depends on the specific facts of the case.

To help you digest the information contained in this tax snapshot (it is death and taxes after all), we are illustrating the possible scenario’s by using a simple example set out below.

In brief:

  1. Mother acquired the dwelling for $200,000 on 1 July 1999 and used it as her main residence (without ever renting it out) up to her date of death (i.e. 1 July 2009).
  2. The mother’s son inherited the dwelling when the mother died and at that date the market value of the dwelling was $300,000.
  3. The dwelling was never used as his main residence, or by a surviving spouse of his mother, and no one else had an occupancy right under the will .
  4. The son sold the dwelling on 1 July 2019 for $400,000.
Main-residence-CGT-exemption-graphic.jpg

Those are the basic facts. Now let’s examine various scenarios.

Will the son qualify for the full main residence exemption on the 1 July 2019 sale?

Based on our example set out above, the son would not qualify for the full main residence exemption.

A beneficiary who inherits a dwelling used as a main residence by the deceased, will only qualify for the full main residence exemption on the sale of such a dwelling if the dwelling was acquired by the deceased:

  1. Before 20 September 1985 (i.e. pre-CGT assets); or
  2. on or after 20 September 1985 (i.e. post-CGT assets), and it was the deceased’s main residence at the date of death, and also was not used for income producing purposes at that time;

and was disposed of:

  1. Within two years of the deceased’s death (regardless of whether the dwelling was used as a main residence after the deceased’s death); or
  2. at any time, provided the dwelling was occupied as a main residence by a surviving spouse, the beneficiary, or a person with a right to occupy the dwelling under the will.

Because the son did not dispose of the dwelling within two years of his mother’s death, and the dwelling was never used as a main residence after her death, the son would therefore not qualify for the full main residence exemption on the eventual sale of the dwelling after holding it for 10 years.

We will now examine whether the son can qualify for the partial main residence exemption.

Will the son qualify for the partial main residence exemption on the 1 July 2019 sale?

For a post-CGT main residence that’s sold by the beneficiary more than two years after the date of death, or sold after the dwelling was never used as a main residence from the date of death (as in our example), we often expect a negative tax outcome (i.e. a substantial capital gain on the sale of such a dwelling).

But there can be a good result if, just before the date of death, it was the deceased’s main residence and it wasn’t being used to produce assessable income.

In such a case there will be two tax advantages:

  1. There will be a step-up in cost base to market value which means that the amount of capital gain will only be calculated from the time of the deceased’s death (i.e. a good result for the beneficiary because a most likely higher cost base will result in a smaller capital gain). So, instead of the son starting with a capital gain of $200,000 (i.e. $400,000 minus $200,000 cost base at date of death), the capital gain would only be $100,000 (i.e. $400,000 minus $300,000 market value at date of death), and ;
  2. in addition, there is a partial exemption that picks up the deceased’s period of main residence. The son’s taxable gain would therefore be reduced to $50,000 (i.e. 10 years/20 years x $100,000 capital gain).

This means the son would benefit from both the market value uplift, and his mother’s use of the dwelling as her main residence.

The son’s gain will then further be reduced by the 50% CGT discount (for assets held for 12 months or more), resulting in an ultimate taxable gain of only $25,000.

How can Findex help you?

If anything in this tax snapshot triggered your interest or you are a type of taxpayer (or know a taxpayer) that may need tax assistance, please contact your Findex adviser.

We have considerable experience advising on a variety of tax issues that may be relevant for you or your business and look forward to discussing other ways we may be able to assist.

After all, your story is our business.

Through our Tax Advisory team across Australia, we can help you identify potential opportunities that may be available for you or your business while at the same time help you to manage your exposure to different risks.

Our Family Office Model means regardless of the location or service offering of your key relationship manager, we can access the right Tax Advisory expertise for you.