Deceased estate and capital gains tax
If CGT applies to an asset you inherited, the following information will help you report the gain or loss in one of the following:
- the date of death Tax return for individuals completed on behalf of the deceased person
- the deceased estate's Trust tax return
- a beneficiary's Tax return for individuals.
The following information may also assist you if you are disposing of an asset that you inherited.
Ways to calculate a capital gain or loss
If you determine that CGT applies, there are three ways of calculating a capital gain or loss:
- indexation method
- discount method
- ‘other’ method.
The method you can use depends on when the asset was acquired and whether you are disposing of it as an individual, a trust, a complying super fund or another entity.
Table: Calculation methods
How to do it
The deceased person acquired the asset either:
- at least 12 months ago
- before 20 September 1985, and you had held the asset for 12 months or more after their death
CGT discount method
Allows you to reduce your capital gain by:
- 50% for individuals (including partners in partnerships) and trusts
- 33 1/3% for complying super funds
Not available to companies or foreign residents
There are more rules for beneficiaries who are entitled to a share of a trust capital gain
Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage
Deceased person acquired the asset before 11.45am (by legal time in the ACT) on 21 September 1999
Allows you to increase the cost base by applying an indexation factor based on the consumer price index (CPI) up to September 1999
Apply the relevant indexation factor, then subtract the indexed cost base from the capital proceeds
For assets held for less than 12 months by the deceased
Basic method of subtracting the cost base from the capital proceeds
Subtract the cost base (or the amount specified by the relevant CGT event) from the capital proceeds
When you work out the dates, you need to exclude both the day of acquisition and the day of the person's death.
Example: Indexation and CGT discount
Leonard acquired a property on 14 November 1998 for $126,000. He died on 6 August 1999, leaving the property to Gladys. She sold the property on 6 July 2015 for $240,000. The property was not the main residence of either Leonard or Gladys.
Although Gladys acquired the property on 6 August 1999, for the purpose of determining whether she had owned the property for at least 12 months she was taken to have acquired it on 14 November 1998 – the day Leonard acquired it.
At the time of disposal, Gladys had owned the property for more than 12 months. As she is taken to have acquired it before 11.45am (by legal time in the ACT) on 21 September 1999 and disposed of it after that date, Gladys could choose to index the cost base. However, if the discount method gave her a better result, she could choose to claim the CGT discount.
If Gladys chooses the discount method, she will have to exclude from the first element of her cost base the amount that represented indexation that had accrued to Leonard up until the time he died.
End of example
Cost base and reduced cost base
The cost base is used in calculating a capital gain, while the reduced cost base is used in calculating a capital loss. They are usually calculated using the cost of the asset when you bought it, however this doesn't apply to assets you inherit.
If you acquire an asset through a deceased estate, the cost base and reduced cost base are worked out differently for different types of assets
Deceased person's main residence
The first element of the cost base and reduced cost base of a dwelling is taken to be its market value on the day the person died, if it:
- passes to you after 20 August 1996 (but not as a joint tenant)
- was the main residence of the deceased immediately before their death, and
- was not being used to produce income at that date.
In some circumstances, if you sell a dwelling that you inherited, you may be able disregard any capital gain or capital loss. This means that you don't include the asset in your tax return, you don't pay any tax on a gain and you don't claim any deduction for a loss.
Find out about:
If you are a joint tenant
If a joint tenant dies and they acquired their interest in the asset on or after 20 September 1985, the first element of the cost base of the interest you acquire from them is the cost base of their interest on the day they died, divided by the number of joint tenants (including you) who acquire it. The first element of the reduced cost base of the interest you acquire from them is worked out similarly.
Example – Surviving joint tenant
In 1999, Ming and Lee buy a residential property for $250,000 as joint tenants. Each one is taken to have a 50% interest in it. On 1 May 2001, Lee dies.
On 1 May 2001, Ming is taken to have acquired Lee’s interest for an amount equal to Lee’s cost base on that day.
If Ming uses the property as his main residence after Lee dies, he may be entitled to the main residence exemption for the interest he acquired from Lee, as well as for his original interest.
End of example
If the joint tenant who dies acquired their interest in the asset before 20 September 1985, the first element of the cost base of the interest you acquire from them is the market value of their interest on the day they died, divided by the number of joint tenants (including you) who acquire it. The first element of the reduced cost base of the interest you acquire from them is worked out similarly.
For the indexation and discount methods to apply, you must have owned the asset (or your share of it) for at least 12 months. As a surviving joint tenant, for the purposes of this 12-month test, you are taken to have acquired the deceased's interest in the asset (or your share of it) at the time the deceased person acquired it.
Example: CGT and joint tenants
Trevor and Kylie acquired land as joint tenants before 20 September 1985. Trevor died in October 2011. For CGT purposes, Kylie is taken to have acquired Trevor's interest in the land at its market value at the date of his death.
Kylie holds her original 50% interest as a pre-CGT asset, and the inherited 50% interest as a post-CGT asset which she is taken to have acquired at its market value at the date of Trevor's death.
Even if Kylie sold the land within 12 months of Trevor's death, she would qualify for the CGT discount on any capital gain she makes on her post-CGT interest. She qualifies for the CGT discount because, for the purposes of the 12-month ownership test, she is taken to have acquired Trevor's interest at the time he acquired it, which was before 20 September 1985.
End of example
Other assets acquired by the deceased person before 20 September 1985
If the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died, unless they made major improvements to it after that date.
If the owner has made a major capital improvement to it on or after 20 September 1985, and the asset passes to:
- a beneficiary, executor or administrator
- the improvement is not treated as a separate asset
- they are taken to have acquired a single asset when the person died
- the cost base of this asset is equal to the cost base of the major improvement on the day the person died, plus the market value of the asset on the day the person died, excluding the improvement
- someone else
- the improvement is not treated as a separate asset
- they are taken to have acquired separate assets when the person died.
Find out more:
James owned a rental property, which he purchased on 1 July 1985. In July 1990, he added a pool and landscaping which exceeded the improvement threshold.
When James died, he left the property to Donald.
The cost base of the rental property is the:
End of example
- cost base of the pool and landscaping plus
- market value of the rental property on the day of James' death, excluding the pool and landscaping.
Other assets acquired by the deceased person on or after 20 September 1985
If a deceased person acquired their asset on or after 20 September 1985, and you did not acquire the asset as the trustee of a special disability trust, the first element of your cost base and reduced cost base is taken to be the deceased person’s cost base and reduced cost base of the asset on the day the person died.
If the deceased person died:
- before 21 September 1999 and you choose the indexation method to work out the capital gain when you dispose of the asset (or when another CGT event happens) you index the first element of the cost base from the date the deceased person acquired it up until 21 September 1999.
- on or after 21 September 1999, you cannot use the indexation method; and when you dispose of the asset, you must recalculate the first element of your cost base to leave out any indexation that was included in the deceased’s cost base.
Special disability trusts
If you acquire an asset as the trustee of a special disability trust, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died.
Expenditure incurred by an executor or administrator
As a beneficiary, you can include in your cost base and reduced cost base any expenditure the executor or administrator would have been able to include in their cost base if they had sold the asset instead of distributing it to you. You can include the expenditure on the date they incurred it.
There are special rules that apply to the calculation of any capital gain or capital loss made from a deceased estate.