Family home: no death taxes, but avoid the CGT trap
An inherited residence can attract CGT, highlighting the need for proper estate planning so beneficiaries aren’t penalised with a large tax bill.
Chris Holloway, senior manager for Equity Trustees, said that while it might be widely known that selling the family home is capital gains tax (CGT) exempt, this might not be the case after you die.
You’re out of free articles for this month
To continue reading the rest of this article, please log in.
Create free account to get unlimited news articles and more!
Although Australia officially abolished death duties in 1979, Holloway said it is a misconception that the main residence is also CGT tax-exempt.
“If you sell the house you live in, there’s no tax. But if the main residence falls into an estate, that suddenly becomes conditional,” he said.
“When it comes to passing on the family home, there needs to be a plan to ensure the next of kin doesn’t end up with a large tax bill. Part of this is knowing the purchase date of the property and the rules surrounding CGT.”
Holloway said taxes for a house are based on the rules put in place on 20 September 1985.
“If the deceased purchased the property before September 20, 1985, but it was inherited after this date, the beneficiary generally has two years to sell the property if they want to qualify for the CGT exemption,” he said.
“However, there are some exemptions allowing next of kin to sell the property without facing a large tax burden.”
He said the main residence CGT exemption applies firstly if the dwelling was the deceased’s main residence just before death and was not being used to produce income.
Additionally, the exemption will apply if the dwelling was sold and settled within two years of the person’s death.
Another exemption can be applied if, from the deceased’s death until disposal, the dwelling is not used to produce income and is the main residence of one or more of the spouses of the deceased immediately before the deceased’s death.
“A well-drafted will is key with respect to this,” Holloway said.
“Home owners also need to make sure they track how they are using the property, as in some cases, a partial CGT exemption can be applied.”
He added that if the inherited property does not meet the criteria for a full exemption, a partial exemption may apply, determined by considering the time the property was used as the main residence versus other uses.
Key factors that determine this include the deceased ownership period and next of kin’s use.
“Despite the perceptions, main residence is not automatically CGT tax-exempt. It is important to know the tax rules or speak to an industry expert who can help guide you through the nuances of main residence CGT exemptions,” he said.