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CGT calculation on deceased estate

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Hi there,

 

We're buying a property from a parent who has inherited it from their deceased mother. The property was purchased after the CGT epoch in 1985 (four days, just for a laugh).

 

As we understand it, once two years has passed since the date of death, CGT is applicable and the gain is calculated based on the difference between the sale price and the value at the date of death.

 

For argument's sake, let's say the value of the house at date of death was $750,000 and the sale price is $1m.

 

The parent seems to think that CGT is payable on a valuation of the property carried out by a real estate agent and think they'll have to pay CGT based on the valuation (as opposed to the sale price) of the property. So they're worried the valuation will come in at, say, $1.3m leaving a CGT liability based on $550,000 rather than $250,000. 

 

I don't think they're right because CGT is calculated on a realised gain rather than a notional one.

 

Thanks in advance for your help.

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Hi @zerogeewhiz,

 

Welcome to our Community!

 

Ordinarily, capital gains tax is calculated as the difference between what was paid for the property, called the CGT ‘cost base’, and mostly being purchase price, and what was received for the property, being its sale price. Capital gains tax is calculated on actual amounts received, unless the transaction was not being sold at arm's length prices, such as a property being bought for less than market value. There are special rules for properties inherited from deceased estates. When a beneficiary sells a property that they have inherited under a will, special rules can apply, such as changes to ‘cost base’ and ‘disregarding’ of the capital gain where particular conditions are met.

 

Generally, if an executor or beneficiary sells a dwelling that was part of a deceased estate the CGT cost base is that of the deceased at time of death- i.e. what the deceased paid for it when they first purchased it.

 

However, if the deceased bought the house under a contract that was signed before 20 September 1985 then the cost base for the executor or beneficiary is its market value at the date of death.

 

Further, CGT on the sale of an inherited property can be ‘disregarded’ where either:

 

The deceased was using the house as their main residence before death (and not being used to derive income) or;

The deceased signed  a contract to buy the house before 20 September 1985

 

And

 

Either:

 

   (a) the beneficiary sells within 2 years of date of death or;

   (b)  for the whole period between death and sale of the property either;

  1.  The spouse of the deceased lived there or;
  2. An individual who had a right under the will to live there lived there or;
  3. The individual who inherited the house lived there

Alternatively, if you would like specific information relating to your circumstances you can contact our Early engagement team by submitting a request form or requesting a call back where someone will contact you do discuss your circumstance.

 

Thanks.

 

3 REPLIES 3

qak
Newbie

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Since the sale is not at arm's length, then yes the market value substitution rule will apply.

 

https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Capital-proce...

 

If you think the real estate agent's estimate is excessive (which it may be if they are trying to win the business of selling the property), you could obtain a valuation from an independent registered valuer.

qak
Newbie

Replies 0

You didn't really ask the question about the cost base of the property, but you need to know that too.

 

Since your grandparent originally purchased 4 days after CGT came in, the cost base of the house to your parent is the ACTUAL cost to the grandparent.

 

Best answer

ATO Certified

Community Support

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Hi @zerogeewhiz,

 

Welcome to our Community!

 

Ordinarily, capital gains tax is calculated as the difference between what was paid for the property, called the CGT ‘cost base’, and mostly being purchase price, and what was received for the property, being its sale price. Capital gains tax is calculated on actual amounts received, unless the transaction was not being sold at arm's length prices, such as a property being bought for less than market value. There are special rules for properties inherited from deceased estates. When a beneficiary sells a property that they have inherited under a will, special rules can apply, such as changes to ‘cost base’ and ‘disregarding’ of the capital gain where particular conditions are met.

 

Generally, if an executor or beneficiary sells a dwelling that was part of a deceased estate the CGT cost base is that of the deceased at time of death- i.e. what the deceased paid for it when they first purchased it.

 

However, if the deceased bought the house under a contract that was signed before 20 September 1985 then the cost base for the executor or beneficiary is its market value at the date of death.

 

Further, CGT on the sale of an inherited property can be ‘disregarded’ where either:

 

The deceased was using the house as their main residence before death (and not being used to derive income) or;

The deceased signed  a contract to buy the house before 20 September 1985

 

And

 

Either:

 

   (a) the beneficiary sells within 2 years of date of death or;

   (b)  for the whole period between death and sale of the property either;

  1.  The spouse of the deceased lived there or;
  2. An individual who had a right under the will to live there lived there or;
  3. The individual who inherited the house lived there

Alternatively, if you would like specific information relating to your circumstances you can contact our Early engagement team by submitting a request form or requesting a call back where someone will contact you do discuss your circumstance.

 

Thanks.

 

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