What You Should Know When Inheriting Property
Receiving an inheritance can be both emotional and financially complex. One of the biggest questions is what are the tax consequences of inheriting property. Understanding the rules can help you manage the situation without unexpected costs later.
Generally, when you inherit property or other assets, the tax implications depend on the type of asset, when it was acquired, and whether the person who left it to you was an Australian resident for tax purposes. Importantly, some exemptions and concessions may apply, particularly around Capital Gains Tax (CGT).
Let’s walk through what you need to know.
What Happens If You Inherit Cash?
If you inherit cash from a loved one, it’s usually straightforward. Cash itself isn’t subject to tax when it’s passed to a beneficiary, assuming it’s in Australian dollars. There’s no income tax or CGT to worry about simply from receiving the money.
However, if you invest that cash and earn interest or dividends, that income will need to be declared on your tax return moving forward.
Tax Basics for Inherited Shares and Property
When assets such as shares, property, or even artwork are transferred upon death, different rules apply.
In most cases, death is not an immediate CGT event. Instead, the asset’s cost base — its value for tax purposes — is either transferred or reset depending on when it was originally acquired.
Here’s how it generally works:
- If the deceased person acquired the asset after 20 September 1985 (the introduction of CGT in Australia), the cost base is usually what they originally paid.
- If the asset was acquired before that date (pre-CGT), the cost base resets to the market value at the date of death.
This distinction becomes important when you eventually sell the inherited asset. Your future capital gain or loss will be calculated based on this cost base.
Case Study: Tax on Inherited Shares
Imagine you inherit shares from your mother’s estate. If she bought them after 20 September 1985, you inherit her original purchase price as the cost base. If she bought them before that date, your cost base is the market value at her date of death.
When you later sell the shares, you may trigger a capital gain or loss based on the difference between your inherited cost base and the sale price.
Shares might seem simple, but over time their value can change dramatically. That’s why knowing the right cost base is critical to working out your tax obligations.
Inheriting a Home or Investment Property: Tax Tips
Inheriting property, especially a residential property, raises some additional issues. Again, no immediate CGT event occurs when you inherit the property, instead your tax obligations arise when you sell it in the future.
The key factors that affect CGT on inherited property include:
- Whether the property was the deceased’s main residence.
- Whether it was used to produce income.
- Whether you sell the property within two years of the deceased’s death.
If the property was your parent’s main residence and wasn’t rented out, you may be eligible for a full CGT exemption if you sell it within two years. If you hold onto the property longer, or rent it out, CGT may apply based on how the property is used after inheritance.
Can You Avoid CGT on an Inherited Property?
The main residence exemption is a critical point. You might be able to avoid CGT altogether if:
- The property was the deceased’s main residence when they died.
- It wasn’t used to earn income.
- You sell the property within two years, or you live in it yourself until it’s sold.
Even if you can’t sell within two years, extensions can sometimes be granted in situations like contested wills or delays in administering the estate.
Careful record-keeping from the date you inherit the property is essential. Document whether you live there, rent it out, or leave it vacant.
How Pre-1985 Properties Are Treated for Tax
Properties acquired before 20 September 1985 have special treatment. If you inherit pre-CGT property and later sell it, you’re taken to have acquired it at its market value on the date of death. This “reset” can reduce the potential capital gain, especially if the property had appreciated significantly over time.
However, if you rent the property out before selling, CGT will apply to any growth in value during the rental period.
It’s important to seek advice if you’re dealing with a pre-CGT asset, as the rules can be nuanced.
Do You Pay Tax on Income from Inherited Assets?
If you inherit a property and decide to rent it out rather than sell it, any rental income you receive is taxable. You’ll need to declare it on your tax return and can claim deductions for eligible expenses like maintenance and property management fees.
Similarly, dividends from inherited shares must be declared, along with any franking credits.
While inheritance itself often isn’t taxable, the income generated by inherited assets definitely is.
What to Do After Receiving an Inheritance
If you’ve inherited property or other assets, here’s what you should do:
- Confirm acquisition details: Find out when the asset was purchased and for how much.
- Get a valuation: Especially important for pre-CGT assets to establish the market value at the date of death.
- Understand your tax position: Are you eligible for exemptions? Will CGT apply if you sell?
- Maintain good records: Keep all documentation, including wills, probate records, valuations, and sale contracts.
- Plan carefully before selling: The timing of the sale can have significant tax consequences.
By following these steps, you can avoid costly mistakes and maximise your inheritance.
Navigating the Tax Rules for Inherited Property
Understanding the tax consequences of inheriting property can help you avoid unexpected tax bills and manage your new assets wisely. Whether it’s shares, cash, or real estate, knowing the rules can make a big difference to your financial outcome.
If you’d like expert guidance on the tax consequences of inheriting property, contact the team at Cotchy today. We’re here to help you make informed decisions and manage your inheritance with confidence.
Source: ATO