Inherited main residence

If you inherit a deceased person’s dwelling, you may be exempt or partially exempt when a CGT event happens to it. The same exemptions apply if a CGT event happens to a deceased’s estate of which you are the trustee. Flowchart 3.6 in appendix 3 sets out the full exemption rules if you inherit a dwelling. Alternatively, the rules are set out below.

If you are a joint tenant and another joint tenant dies, their interest in the dwelling is taken to pass in equal shares to you and any other surviving joint tenants on that date.

For the purpose of the main residence exemption, you are treated as if that interest in the dwelling has passed to you as beneficiary of the deceased estate, which means the following rules apply to that interest. For more information about other rules affecting joint tenants, see Joint tenants.

If you are a surviving joint tenant, beneficiary or trustee of a deceased estate and a CGT event happens to your residential property in Australia that you inherited from a foreign resident, you may no longer be entitled to claim the main residence exemption for the deceased’s ownership period. There is a transitional period. To find out how this affects you see Foreign residents and main residence exemption.

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 make 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 (it does not matter whether the dwelling was the main residence of the deceased person).

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. In either case, you disregard any capital gain or capital loss you make from a CGT event that happens to the dwelling if either of the following two conditions applies.

1. You disposed of your ownership interest within two years of the person’s death, that is, if the dwelling was sold under a contract, settlement occurred within two years. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the two year period. The Commissioner has the discretion to extend the two year period for CGT events (such as a sale) happening in the 2008–09 income year and later years, see Commissioner may extend the two year time period.
2. From the deceased’s death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:
   3. 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)
   4. an individual who had a right to occupy the home under the deceased's will (including a right to occupy the home as a result of a court order under the relevant family provision legislation that takes effect as if it had been made as a codicil to the deceased's will)
   5. 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 stopped living in it) if they choose to treat it as their main residence under the continuing main residence status after dwelling ceases to be your main residence rule.

The requirement that the dwelling is the main residence of an individual who had a right to occupy it under the deceased’s will is satisfied if the individual moves into the dwelling when it is first practicable to do so. This requirement will be satisfied where the delay in moving is because the dwelling cannot be occupied until probate and administration of the estate is granted.

B. The deceased acquired the dwelling on or after 20 September 1985.

You disregard any capital gain or capital loss you make when a CGT event happens to the dwelling or your ownership interest in the dwelling if either of the following two points applies.

1. 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.
2. One of the conditions 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:
   3. their main residence, and
   4. not being used to produce income.
    

A dwelling can still be regarded as the deceased’s main residence even though they stopped living in it, see Continuing main residence status after dwelling ceases to be your main residence.

Partial exemption

If you do not qualify for a full exemption from CGT for the home, you may be entitled to a partial exemption.

You calculate your capital gain or capital loss as follows:

Capital gain or capital loss amount × (non-main residence days ÷ total days)

Non-main residence days

‘Non-main residence days’ is the number of days that the dwelling was not the main residence.

1. 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 the main residence of one of the following:
   2. a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)
   3. an individual who had a right to occupy the dwelling under the deceased’s will, or
   4. you, as a beneficiary, if you disposed of the dwelling as a beneficiary.
    
2. 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

1. 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.
2. If the deceased acquired the ownership interest on or after 20 September 1985, total days is the number of days in the period from when the deceased acquired the dwelling until you disposed of your ownership interest.

A further adjustment may be required if the dwelling was a main residence, but was partly used to produce income, for example, if, for a period, part of it was rented out or used as a place of business.

If you dispose of your ownership interest in a dwelling within two years of the person’s death, 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. See Commissioner may extend the two year time period.

You also ignore any non-main residence days before the deceased’s death in calculating the capital gain or capital loss if:

• you acquired the dwelling after 20 August 1996
• the dwelling was the deceased’s main residence just before their death, and
• the dwelling was not being used to produce income at the time of their death.

Using a home you inherited to produce income

If a person acquired their main residence on or after 20 September 1985, and they died and it passed to you as a beneficiary (or as trustee of their estate) after 20 August 1996, you are taken to have acquired the dwelling at its market value at the time you first used it to produce your income if:

• you first used the dwelling to produce income after 20 August 1996
• when a CGT event happens to the dwelling, you would get only a partial exemption because you used the dwelling to produce assessable income during the period you owned it
• you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income, and
• the CGT event did not happen to the dwelling within two years of the person’s date of death.

If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice.

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 to the dwelling.

The first element of the cost base and 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 (but not as a joint tenant), 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 and reduced cost base on the day they died. You may need to contact the trustee or the deceased’s recognised tax adviser to obtain the details. 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 your capital gain from the property.

If you are a beneficiary, the cost base and the reduced cost base also include amounts that the trustee of the deceased’s estate would have been able to include in the cost base and reduced cost base.

Continuing main residence status

If the deceased was not living in the home at the date of their death, they or their trustee may have chosen to continue to treat it as their main residence. You may need to contact the trustee or the deceased’s recognised 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 stopped living in it, if it was used to produce income after they stopped living in it.

Commissioner may extend the two year time period

A trustee or beneficiary of a deceased estate may apply to the Commissioner for an extension of the two year time period, where the CGT event happened in 2008-09 or later. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

• the ownership of a dwelling or a will is challenged
• the complexity of a deceased estate delays the completion of administration of the estate
• a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two year period (for example, the taxpayer or a family member has a severe illness or injury), or
• settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control.

These examples are not exhaustive.

In exercising the discretion the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling.