Inheriting a Home – The rules if a full CGT exemption does not apply

There is expected to be a massive transfer of intergenerational wealth in the coming years with baby-boomer generation wealth being bequeathed.

And according to the experts a lot of this wealth will be tied up in real estate, particularly the family home (which most of the baby-boomer generation have been able to afford).

CGT Exemption

So, once again, the tax rules that apply to inherited property come very much into play and, in particular, the Capital Gain Tax (CGT) rules that apply to inherited homes.

And in this regard, nothing is more important than the full CGT exemption that applies to an inherited family home if it is sold and settled within 2 years of the deceased’s death.

Importantly, this 2-year period can be extended by the Commissioner (or an extension can be self-assessed in accordance with certain guidelines) where there are circumstances beyond the control of the executors or beneficiary that prevent its sale within 2 years.

A full exemption is also available where the inherited family home is sold after it has been occupied as the home of a “specified” person (such as a surviving spouse or beneficiary) from the time of the deceased’s death until its sale.

Furthermore, in either case, a pre-condition to be able to access these exemptions is that the home must have been the deceased’s main residence at their date of death or deemed to be by the absence concession.

However, where neither of these full exemptions apply, then a partial (or no) exemption must be calculated under special rules in relevant CGT provisions. Broadly, these rules provide for a “pro-rata” partial exemption to reflect the period of time both before and after the deceased’s death when it was not the home of the deceased and/or a “specified” person.

But these partial exemption rules are complex and require careful consideration.

For example, they contain concessions to allow a greater period of time to be favourably taken into account – or to be ignored to the detriment of the taxpayer (and no more so if the deceased was an “excluded foreign resident”).

But they also contain other certain traps.

And these traps can make a huge difference to the amount of the capital gain that may be subject to any pro-rata calculation and, in the current situation with homes worth so much, this may make a difference between millions of dollars being subject to the pro-rata, or only a few hundred thousand.

So, for those who will be fortunate enough to come into substantial wealth through inheriting their parent’s home, it is vital to seek your accountant’s advice on the matter, and this is always better done before the problem arises.

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