by Benny Berkowitz
Many readers of the Australian Jewish News can expect to inherit the home of a deceased family member, an event that may have significant tax implications. It is therefore essential these are taken into account when a will or estate-planning strategy is being drawn up.
For tax purposes, a main residence is defined as the home used for your residential accommodation. And, although there are no immediate tax consequences to the beneficiary upon inheriting the main residence, tax may apply when the property is sold.
You won’t have to pay capital gains tax (CGT) if you sell the property within two years of the owner dying or live in it as your main place of residence until you decide to sell. (Providing that the deceased was using the property as their main residence until their passing and it was not used as an investment property.)
However, if you hold the property for more than two years and use it for investment purposes, CGT will apply on a pro-rata basis when you sell it. This will be calculated on the difference between the purchase value and the sale price.
When an inherited property is rented out, any improvements made to attract a higher rental value are added to the cost base of the property and then factored into the CGT calculations when the property is sold.
Moving into a nursing home
In many cases, although the deceased may not have been living in their property at the time of their passing – for example, living in a nursing home – they may have chosen to treat their property as their main residence.
Generally, an election to do this is made by their accountant at the time of moving into the nursing home. The residence will be regarded as the deceased’s main residence indefinitely if it is not rented out, and for a maximum of six years if it is.
A very important date
The most significant factor affecting any tax paid is the date that the property was first acquired by the deceased.
If the property was purchased before 20 September 1985 and used by the deceased as their principal place of residence, the beneficiary is deemed to have acquired the property at its current market value at the date of death.
However, if the property was purchased after 19 September 1985 and used by the deceased as their principal place of residence, the beneficiary is deemed to have acquired the property at its original cost price (that is, what the deceased had paid for it).
What to do if the beneficiaries disagree
If you inherit a share in a property, the other beneficiaries may wish to sell up but you want to retain your share. If this happens, you can arrange with them to buy out their interest based on a current market valuation. And if you borrow money to do this and use the property for investment purposes, the interest might be tax deductible.
The many factors affecting the tax treatment of inherited property mean careful estate planning should not only ensure that a person’s assets are transferred according to their wishes, but that it’s done in the most tax-effective way.
A valid will is fundamental in ensuring that a person’s wishes and intentions are carried out because people seek the comfort of knowing that, at the time of their passing, the assets they have worked a lifetime to build are distributed to their designated beneficiaries.
It therefore goes without saying that you should consider having your existing tax structure reviewed by a tax or legal professional. We all work extremely hard to build our wealth, and it should be appropriately structured so that it can be passed on in the future as intended.
Benny Berkowitz is the director of
Chi Berkowitz Partners.