22 Jun Tax Q&A: Property Inheritance
Q: My mother passed away in January 2017. She owned a triplex property. My mum lived in one unit, I live in one, and my sister lives in the other. My mother had purchased the property a very long time ago, before 1986.
When she died the entire property was given to me, my sister and my brother. My brother rented out the unit where my mum was living. My sister and I continued to live in the other two units.
My brother now wants to sell property, as we will have to pay capital gains tax after two years from when my mother passed. Do we pay CGT if my sister and I live in the property? If we buy our brother out during the two-year timeframe, do we still have to pay CGT if we ever sell? Also, how much is capital gains tax? I just don’t get it.
A: This may be a complex situation. Each of the three siblings owns one third of the entire property. Even though there may be three separate titles, I have assumed that each sibling owns one third of each of the three units. If each sibling does own one entire title, the tax consequences will be different. I will refer to your mother’s unit as Unit 1 and to the others as Units 2 and 3.
Unit 1 was your mother’s principal place of residence (PPOR). If this unit is sold within two years of your mother’s death, there will be no capital gains to pay on the unit. So, if you each own one third of this unit, no CGT will apply within the two-year period. If the unit is not sold within two years, you would be deemed to have acquired this unit on your mother’s date of death at the market value at that time. Any increase from this market value to the sale price would be subject to CGT for the three owners.
“Any increase from this market value [at date of death] to the sale price would be subject to CGT for the three owners”
The situation for Units 2 and 3 is the same, although as each owner occupies one of the units, that one third of each unit would be exempt from CGT. The remaining two thirds of each unit would be subject to CGT. Again, the increase between the market value and the sale price would be the starting point for the calculation of CGT.
If each of the siblings acquired a separate title to one unit each, the situation does change. If your brother acquired Unit 1 and sold within two years, he would pay no CGT on the sale. If you and your sister acquired the units you were living in under separate titles, depending on the date your mother acquired the property, you would be deemed to have acquired the unit/s either at market value (if purchased pre-introduction of CGT in 1985) or at your mother’s purchase price (post-introduction of CGT).
If you and your sister both continue to live in the units as your PPORs, there will be no capital gains tax if the home was bought by your mother pre-CGT. If post-CGT there will be capital gains, calculated as a percentage of your PPOR residence against the total period of ownership (from your mother’s original purchase date).
CGT is not a separate tax. It is a separate calculation. Once the gain is calculated, the net capital gain is added to your other income and taxed at whatever marginal tax rate it brings you to. Due to so many complexities, I strongly suggest that you seek professional advice about your situation before you undertake any transaction regarding the property.
Need to know
– If purchased before 20 September 1985, an inherited property is deemed to have been acquired at market value on the date of death if not sold within two years.
– Any increase from market value to the sale price will be subject to CGT.
– CGT is not a separate tax. It is a separate calculation.
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