• Inherited main residence

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a CGT event happens in relation to it. The same exemptions apply if a CGT event happens in relation to a deceased's estate of which you are the trustee. For more information, see chapter 9.

    Example
    Improvement on land acquired before 20 September 1985

    Martin bought a home in 1984. On 1 December 1993 he undertook major capital improvements worth $85 000. He sold the home under a contract that was settled on 1 December 2000 for $500 000. At the date of sale, the indexed cost base of the improvements was $95 370.

    Of the $500 000 he received for the home, $100 000 could be attributed to the improvements. The improvements were used by Martin to produce income from the time they were finished until the time they were sold with the home.

    The Home first used to produce income rule does not apply to the improvements because they were first used to produce income before 21 August 1996.

    Test 1

    Is the cost base of the improvements more than 5% of $500 000-that is, $25 000?

    Yes

    Test 2

    Is the cost base of the improvements more than the 2000-01 threshold of $92 082?

    Yes

    As the answer to both questions is Yes and the improvements were used to produce income, the capital gain on the improvements is taxable. The capital gain is calculated as follows:

     

    $

    Amount of proceeds attributable to the improvements

    100 000

    Less cost base of improvements indexed for inflation

    95 370

    Taxable capital gain

    4 630

    If the improvements had been used as part of Martin's main residence, this gain would be exempt. However, the home (including the improvements) had been rented out for one-third of the period, so one-third of the capital gain made on the improvements would have been taxable.

    As Martin acquired the improvements before 11.45am on 21 September 1999 and sold the home after that time-and had held the improvements for at least 12  months-he could use either the indexation method (as in the calculation above) or the discount method to calculate his capital gain on the improvements.

    Full exemption

    Deceased died before 20 September 1985

    As you acquired the dwelling before 20 September 1985, any capital gain you make is exempt. However, major capital improvements you made to the dwelling on or after 20 September 1985 may be taxable (see Major capital improvements to a dwelling acquired before 20 September 1985).

    Deceased died on or after 20 September 1985

    (a) The deceased acquired the dwelling before 20 September 1985

    You may have an ownership interest in a dwelling that passed to you as a beneficiary in a deceased estate or you may have owned it as trustee of a deceased estate, whether or not the dwelling was the main residence of the deceased person. In either case, any capital gain or capital loss you make from a CGT event that happens in relation to the dwelling is disregarded if either of the following applies:

    1. you disposed of your ownership interest within two years of the person's death. This applies whether or not you used the dwelling to produce income during the two-year period. The dwelling does not have to be your main residence during the two-year period, or
    2. from the deceased's death until you disposed of your ownership interest, the dwelling was not used to produce income. For this period, the dwelling must also have been the main residence of one or more of:
      • a person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased)
      • an individual who had a right to occupy the home under the deceased's will, or
      • you, as a beneficiary-if you disposed of the dwelling as a beneficiary.
       

    The dwelling can be the main residence of one of the above people (even though they may have ceased living in it) if they chose to treat it as their main residence under the rule Continuing main residence status after dwelling ceases to be your main residence.

    (b) The deceased acquired the dwelling on or after 20 September 1985

    Any capital gain or capital loss you make when a CGT event happens in relation to a dwelling or ownership interest in a dwelling you inherit will be disregarded if:

    • condition 2 in (a) above is met and the dwelling passed to you as beneficiary or trustee on or before 20 August 1996. For this to apply, the deceased must have used the dwelling as their main residence from the date they acquired it until their death, and they must not have used it to produce income, or
    • one of the conditions 1 or 2 in (a) above is met and the dwelling passed to you as beneficiary or trustee after 20 August 1996, and just before the date the deceased died it was their main residence and was not being used to produce income.

    A dwelling can still be regarded as the deceased's main residence even though they ceased living in it if they or their trustee chose to treat the dwelling as the deceased's main residence. This may happen if, for example, the person moved to a nursing home. 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.

    Example
    Full exemption

    Rodrigo was the sole occupant of a home he bought in April 1990-that is, after 20 September 1985. He did not live in, or own, another home. He died in January 1999 and left the house to his son, Petro. Petro rented out the house and then disposed of it 15 months after his father died. Petro is entitled to a full exemption from capital gains tax as he acquired the house after 20 August 1996 and disposed of it within two years of his father's death.

    Part exemption

    If you do not qualify for a full exemption from capital gains tax for the home you may be entitled to a part exemption.

    You calculate your capital gain or capital loss as follows:

    Capital gain or loss amount

    X

    Non-main residence days
    Total days

    Non-main residence days

    'Non-main residence days' is the days that the dwelling was not the main residence.

    a. If the deceased acquired the dwelling before 20 September 1985, non-main residence days is the number of days in the period from their death until settlement of your contract for sale of the dwelling when it was not used to produce income and was not the main residence of one of the following:

    • a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)
    • an individual who had a right to occupy the dwelling under the deceased's will, or
    • you, as a beneficiary-if you disposed of the dwelling as a beneficiary.
     

    b. If the deceased acquired the dwelling on or after 20 September 1985, non-main residence days is the number of days calculated under (a) plus the number of days in the deceased's period of ownership when the dwelling was not their main residence.

    Total days

    a. If the deceased acquired their ownership interest before 20 September 1985, 'total days' is the number of days from their death until you disposed of your ownership interest.

    b. If the deceased acquired the ownership interest on or after 20 September1985, total days is the number of days in the period from when the deceased acquired the dwelling until you disposed of your ownership interest.

    There are some situations in which any non-main residence days and total days before the deceased's death are ignored in calculating the capital gain or capital loss. This happens if:

    • you acquired the dwelling before 21 August 1996 and, during the full period the deceased owned it, the dwelling was their main residence and was not used to produce income, or
    • you acquired the dwelling after 20 August 1996 and it was the deceased's main residence just before death and was not being used to produce income at that time.

    If you disposed of your ownership interest in the dwelling within two years of the person dying, you can ignore the main residence days and total days in the period from the person's death until you dispose of the dwelling if this lessens your tax liability.

    Example
    Part exemption

    Vicki bought a house under a contract that was settled on 12 February 1994, and she used it solely as a rental property. When she died on 17 November 1997, the house became the main residence of her beneficiary, Lesley. Lesley sold the property under a contract that was settled on 27 November 2000.

    As Vicki had never used the property as her main residence, Lesley cannot claim a full exemption from capital gains tax. However, as Lesley used the house as her main residence, she is entitled to a part exemption from capital gains tax.

    Vicki owned the house for 1375 days and Lesley then lived in the house for 1106 days, a total of 2481 days. Assuming Lesley made a gain of $10 000, the taxable portion is:

    $10 000 X

    1375
    2481

    = $5542

    As Lesley entered into the contract to purchase the property before 11.45am on 21 September 1999 and entered into the contract to sell it after that time-and held the property for at least 12 months-she can use either the indexation or the discount method to calculate her capital gain.

    Cost to you of acquiring the dwelling

    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, the acquisition cost is the deceased's cost base or reduced cost base on the day they died.

    Note that even though the deceased was not living in the home at the date of 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.

    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 2001 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 obtain 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 and had chosen to treat it as his main residence under the Continuing main residence status after dwelling ceases to be your main residence rule, the house would be considered to be his main residence until his death because he rented it out for less than six years.

    However, even if this choice had been made, Con would only obtain a part exemption for the period Aldo owned the house, because it was being used to produce income just before Aldo died. Con would obtain the exemption for the period Aldo did not use the house to produce income.

    Last modified: 31 Aug 2010QC 16195