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Do You Have to Pay Tax on Inherited Property in Australia?

Do You Have to Pay Tax on Inherited Property in Australia?

By Prime Advisory, 11 May 2024

The question ‘do you have to pay tax on inherited property in Australia?’ is a complex one. We outline various applicable scenarios and their tax implications.

You’ve inherited a property—and you’re thinking of selling it. 

Well, the Australian Taxation Office (ATO) wants to hear all about it.

Although it has been decades since Australians had to pay tax on the acquisition of an inheritance, it’s a different story when it comes to selling inherited assets. 

Enter three words you’re likely familiar with: capital gains tax (CGT).

As you may be aware, CGT is a tax that applies when assets—including property, shares, and even crypto—are sold, resulting in a profit. 

This includes inherited assets—and more specific to this topic, property.

But when selling inherited property, the application of CGT is complex. Various factors determine if, when, and how it applies. 

Then, there’s further distinction depending on whether the property has been used as a main residence or an investment, or even both. 

In this article, we explore the tax implications associated with the sale of an inherited property based on several scenarios.

Inheriting Property and CGT: Selling a Main Residence 

Here’s a common script for many Australians…

You’ve inherited a property that was the main residence of its since-deceased owner, typically a family member. 

What happens? 

Well, the residence will generally be exempt from CGT if it was the main dwelling—so not used to generate income—from the time the deceased acquired the property until their passing, and you sell it within two years.

It will also be exempt from CGT if from the date 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 partner who was permanently separated from the deceased
  • An individual who had a right to inhabit the property under the deceased’s will
  • You, the beneficiary—as long as you dispose of the property as a beneficiary

In a case where the deceased person passed away before 20 September 1985—when CGT came into effect—and the property transfer also occurred before that date, you’ll be completely exempt from the tax.

However, any major property improvements or additions you made on or after 20 September 1985 may be subject to CGT.

Inheriting Property and CGT: Selling an Investment 

In this example, you’ve inherited a property that was used to generate an income—and was never treated as a main residence. 

If selling this property, the full CGT applies.

However, if the asset was used as both a main residence and as an investment property, you may be entitled to a partial CGT exemption.

The partial exemption is calculated using the following method:

Capital gain x non-main residence days + total days = capital gain or loss.

Essentially, you will need to pay CGT on the time the asset was generating income, but you’ll be eligible for an exemption for the period that it was a main residence—typically a 50% discount, provided it was owned for longer than twelve months.

However, if the property was used as a rental and as a main residence, and was the deceased’s main residence just prior to their death and is disposed of within two years, the asset should be exempt from CGT.

Inheriting Property and CGT: Other Scenarios

Of course, there are several other applicable examples relating to property inheritance.

For instance, if you inherit an investment property, live in it as your main residence, and then decide to sell it, another set of rules apply. 

Spoiler alert: in this case, partial CGT exemptions will be available. 

Then, there’s the subject of foreign residents and inherited property. 

In short, if you are a foreign resident, or the deceased was a foreign resident, you are typically ineligible for the main residence exemption and the 50% CGT discount when you sell the property.

Additionally, if you wish to not sell at all—instead utilising your inherited property as a rental—a whole new set of tax implications and benefits come into play.

These include the ability to claim various tax deductions that apply to anyone who owns an investment property, such as land tax, council rates, and strata and insurance fees. Further to that, you will have the opportunity to claim depreciation deductions.

As you can see, the question do you have to pay tax on inherited property in Australia? is a complex one to answer. 

It’s why we suggest getting expert advice on the matter. 

“While the maxim of ‘death and taxes’ holds true, death itself is not a CGT event,” PrimeAdvisory Senior Advisor, Alex Ryan, said.

“Rather, the deceased will typically leave this burden unbeknownst to their beneficiaries, who often act unadvised when selling and transferring property during and after the administration of the deceased’s estate. 

“It pays to seek advice before decisions are made, especially when considering selling inherited property.”

Untangling CGT and Property Inheritance

If you need help to navigate the complexities of CGT and property inheritance, you’re in the right place.

Our experienced advisors know Australian tax laws like the back of their hands. 

They’ll walk you through the ins and outs of this topic—and any other tax queries you may have—and strategise accordingly.

Contact us or call +61 02 9415 1511.

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