If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base.
These rules apply in calculating any capital gain or capital loss when a CGT event happens in relation to the dwelling.
The first element of the cost base or reduced cost base of a dwelling-its acquisition cost-is its market value at the date of death if either:
- the dwelling was acquired by the deceased before 20 September 1985, or
- the dwelling passes to you after 20 August 1996 and it was the main residence of the deceased immediately before their death and was not being used to produce income at that date.
In any other case, your acquisition cost is the deceased's cost base or reduced cost base on the day they died. If that cost base includes indexation you must recalculate it to exclude the indexation component if you prefer to use the discount method to work out you capital gain from the property.
Example: Continuing main residence status
Aldo bought a house in March 1995 and lived in it. He moved into a nursing home in December 1996 and left the house vacant. He chose to treat the house as his main residence after he ceased living in it under the continuing main residence status after dwelling ceases to be your main residence rule.
Aldo died in February 2003 and the house passed to his beneficiary, Con who uses the house as a rental property.
As the house was Aldo's main residence immediately before his death and was not being used to produce income at that time, Con can get a full exemption for the period Aldo owned it.
If Con rented out the house and sold it more than two years after Aldo's death, the capital gain for the period from the date of Aldo's death until Con sold it is taxable.
If Con had sold the house within two years of Aldo's death, he could have ignored the main residence days and total days between Aldo's death and him selling it-which would have given him exemption for this period.
If Aldo had rented out the house after he ceased living in it, he could choose to treat it as his main residence (see Continuing main residence status after dwelling ceases to be your main residence). The house would be considered to be his main residence until his death because he rented it out for less than six years.
If this choice had been made, Con would get an exemption for the period Aldo owned the house.
End of exampleNote that even though the deceased was not living in the home at the date of their death, they or their trustee may have chosen to treat it as their main residence. You may need to contact the trustee or the deceased's tax adviser to find out whether this choice was made. If it was, the dwelling can still be regarded as the deceased's main residence:
- for an indefinite period-if the dwelling was not used to produce income after the deceased stopped living in it, or
- for a maximum of six years after they ceased living in it-if it was used to produce income after they ceased living in it.
If you are a beneficiary, the cost base or reduced cost base also includes amounts that the trustee of the deceased's estate would have been able to include in the cost base or reduced cost base.
For more information about deceased estates, see chapter 9.