If a person purchased their main residence on or after 20 September 1985 and they died and it passed to a beneficiary after 20 August 1996, the beneficiary is taken to have purchased the property at its market value at the time it was first used to produce income if:
(a) The beneficiary first used the property to produce income after 20 August 1996
(b) When the property is sold, the beneficiary would get only a partial exemption because the property was used to produce income during the period the beneficiary owned it
(c) The beneficiary would have been entitled to a full exemption when the property was sold if the property was sold immediately before the beneficiary first used it to produce income
(d) The property was not sold within two (2) years of the person’s date of death.
If all of the above apply, the beneficiary must work out the capital gain or loss using the market value of the dwelling at the time the beneficiary first used it to produce income.
If the beneficiary inherits a property that the deceased had owned, there are special rules that apply for calculating the cost base. These rules apply in calculating any capital gain or capital loss when the property is sold. The purchase price of the dwelling is its market value at the date of death if either:
(a) The dwelling was not purchased by the deceased before 20 September 1985
(b) The property passes to the beneficiary after 20 August 1996 and 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 purchase cost is the deceased cost base on the day that they died.
If the deceased was not living in their home at the date of their death, they or their trustee may have chosen to continue to treat it as their main residence. The dwelling can still be regarded as the deceased main residence:
(a) For an indefinite period if the dwelling was not used to produce income after the deceased stop living in it
(b) Or for a maximum of six (6) years after they stopped living in it, if it was used to produce income after they stopped living in it.
The example below demonstrates how this rule applies:
Alto bought a house in March 1995 and lived in it. He moved into a nursing home in December 2003 and left the house vacant. He chose to treat the house as his main residence after he stopped living in it. Alto died in February 2009 and the house passed to his beneficiary Con who used the house as a rental property. As the house was Alto’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 Alto owned it.
If Con rented out the house and sold it more than two (2) years after Alto’s death, the capital gain for the period from the date of Alto’s death until Con sold it, is taxable.
If Con had sold the house within two (2) years of Alto’s death, he could have ignored the main residence days and total days between Alto’s death and him selling it – which would have given him exemption for this period.
If Alto had rented out the house after he stopped living in it, he could also have chosen to continue to treat it as his main residence. The house would be considered his main residence until his death because he rented it out for less than six (6) years.
If this choice had been made, Con would get an exemption for the period that Alto owned the house
Next month we will continue to look at the CGT issues surrounding properties that are inherited.