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Received an Inheritance? What You Should be Aware of When it Comes to Selling Inherited Assets.

Written by Melisssa Grimshaw

We are going to look at the nasty tax you may or may not be aware of that applies to any non-super assets that are inherited from your loved ones – Capital Gains Tax (CGT). 

The assets that we are going to discuss include – Property -Principal place of residence of the deceased, investment property, direct shares or managed funds and cash.  These are often the most common assets that are inherited outside of superannuation benefits.

All assets are assumed to be held in the personal name of the deceased and owned 100%.

The most important consideration in the first instance is, if you are going to sell an inherited asset – seek professional advice from your accountant/financial planner. 

What is capital gains tax (CGT)? 

Capital gains tax (CGT) is the tax you pay on realised profits following the sale of a capital assets such as property, a share or portfolio of shares. Your capital gains (considering any capital losses) are declared in your income tax return, with assessable portion of your gain taxed at your marginal tax rate.

Upon selling an asset, the difference between what is known as the cost base (purchase) and sale price (very simplistic) is the gross gain or loss that you have made on that asset.

The gain is subject to tax.  The gross gain may be able to be discounted by 50% if the asset was held longer than 12 months.  The net gain is then included in your tax return of the year of sale and taxed at your personal marginal tax rates in the year of sale.

Important to note – Any assets that were purchased after 20 September 1985, CGT applies to.  Any asset purchased before 20 September 1985, are CGT tax free in the hands of the owner.  This changes as it passes to a beneficiary.

CGT is only triggered at a sale of an asset, not when it passes directly to a beneficiary.

Our Case Study – Mary and George

Mary, a widower, passed away in 2024 and was still living in her home.  She left the following assets to her nephew George.  George’s inheritance consisted of:  

Mary’s Home – $600,000

BHP Shares – $20,000

Investment property – $700,000

Cash – $50,000.

Note – All assets were purchased AFTER  20 September 1985 to keep it simple and AFTER

21 September 1999. 

What is the overall CGT liability for George that he needs to consider when selling or retaining any of these assets. 

Capital gains tax (CGT) consideration for George’s inherited assets.

Cash

Cash is CGT tax free.  Therefore, the best way to inherit assets going forward.  The estate may have sold assets and paid the taxes, with you receiving the proceeds.

Result

George can retain the $50,000 CGT free and can do what he wants with it.

Inheriting Mary’s Principal place of Residence

There are different rules again if you or your loved one is foreign resident, however we will assume that both are residents of Australia.  There are several dates that are important when determining the implications of selling a Principal Place of Residence of a deceased.

Mary purchased her home in 2001 for $200,000.  She has lived in this home as her principal place of residence up to her death in 2024 – The home is valued at $600,000.  The asset was inherited by her nephew – George.

Result

The home was purchased after 20 September 1985.  Therefore, capital gains tax implications would apply to this asset for George.

The total gain on this asset for George is $400,000 gross (ie $600,000 – $200,000). He would be entitled to a 50% discount as Mary owned it longer than 12 months, the net capital gain would be $200,000 to be included in George’s personal tax return and taxed at his personal marginal tax rate.

HOWEVER

There is an exemption for George on this asset.  Should George sells the property, within a two-year period of inheriting the home as it was Mary’s Principal place of residence, there is a full CGT exemption ie tax free.  He can rent the property out for a period if he wishes, and it won’t affect the exemption as long as it is sold within the two-year window from Mary’s date of death.

Should George to decide to retain the property after the two years has passed and essentially becomes an investment property and continues to rent it out, future capital gains at time of George selling it, is based on the value of the asset at time of Mary purchasing the asset – ie $200,000.

Therefore, the longer George owns the property, the greater the capital gain may be at the time of the eventual sale of the property.

Note:  If Mary had purchased the property before 20 September 1985, the property cost base for George becomes the value of the property at the date of Mary’s death.

Inheriting shares/managed funds – eg BHP shares

These assets are less complicated at time of sale once inherited from a loved one.  If the ownership of these assets is transferred to a beneficiary, this does not trigger capital gains (due to being an estate asset).

Once the beneficiary sells the shares or managed funds is when CGT is triggered.  Depending on when the assets were purchased by the deceased determines the cost base of the asset to work out the difference between this and sale price, to identify the actual gain or loss.

Result

In this case, Mary had BHP shares which she purchased in 2021 for $10,000.  As the share passes to George, the cost base for the BHP shares is $10,000.  He sells them for $20,000 in 2024, his capital gain is $10,000, discounted by 50% as Mary had held longer than 12 months, his net capital gain is $5,000, taxed at his personal marginal tax rates.

Note : If the deceased had the assets before 20 September 1985, the cost base is formed on the  value of the assets at the date of death of the deceased.

Inheriting an investment property

Similar to BHP Shares.  The investment property, always being an investment property, is passed to the beneficiary and no capital gains tax implications occur until it is sold.

In George’s case, Mary purchased the investment property in 2000, for $150,000.  The property is now valued at $700,000 and George sells it for $700,000 in 2024.

Result

George has triggered a capital gain of $550,000, discounted by 50% as held longer than 12 months by Mary, he has a net capital gain of $275,000 that he needs to include in his personal tax return for the 2023/2024 year.

If he did not sell the property, straight way, there would not be CGT implications until further down the track when he does sell, based on a cost base for future gains to be identified of $150,000.

Implications of George’s actions and inheritance.

Based on George’s decision around the assets he inherited from Mary, he has ended up with a potential tax bill of $131,600 inc. Medicare levy as follows:

  • Cash – $50,000 – Nil tax
  • Mary’s Home – retained with a carried forward cost base of $200,000 for future sale date to identify future CGT implications, If he sells within the next two years – still nil CGT, but if retains longer than 2 years, will trigger CGT future sale.
  • Sale of BHP – triggered a capital gain of $5,000.
  • Sale of investment Property – Trigged a capital gain of $275,000.

George has net capital gains of $280,000 to be included in his 2023/2024 tax return and taxed at personal marginal tax rates.  Assuming this is 45% + 2% Medicare levy, his tax payable is estimated to be $131,600.

Moral of the Story

Inheriting assets and sale of these assets can be complicated financially.   There are so many different dates and variables that can raise tax implications of selling or retaining and timing of potential sales.  Professional advice is important.

The other key aspect of inheriting assets that are likely to be subject to Capital Gains Tax, need to ensure that the deceased has retained good record keeping allowing the ease of calculating CGT implications, and these records are passed to the intended beneficiary.

Professional advice should be obtained to ensure that any decisions that are made regarding the sale and retention of assets are an informed one. This may help you avoid costly mistakes or surprises down the track.

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