When the deceased person’s home has a mixed history of being a principal home and a rental, combined with the fact the estate sells the otherwise principal home after 2 years, the CGT is not so easy to understand for the family left to deal with how and if CGT is applicable?

Main Residence Inheritance

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What is Generally Understood!

What is not generally understood?

What is hard to understand!

Partial CGT Exemption after 2 Years S 118-200 ITAA 1997

PS LA 2008/4

You calculate your capital gain or capital loss using the formula:

A capital gain or capital loss amount

x

Non-main residence days / Total days

The capital gain or capital loss is the amount made from the disposal of the dwelling (before applying for any main residence exemption).

The non-main residence days are the sum of:

(a) if the deceased acquired the ownership interest on or after 20 September 1985 – the number of days in the deceased’s ownership period when the dwelling was not the deceased’s main residence; and

(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of one of the following:

● a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)

● an individual who had a right to occupy the dwelling under the deceased’s will, or

● you, as a beneficiary if you disposed of the dwelling as a beneficiary.

Total days is:

(a) if the deceased acquired the ownership interest before 20 September 1985, the number of days from the deceased’s death until you disposed of your ownership interest; or

(b) if the deceased acquired the ownership interest on or 20 September 1985 – the number of days in the period from the acquisition of the dwelling by the deceased until you disposed of your ownership interest.

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If the deceased main residence is sold after the 2 years, and no extension is sought from the ATO for exceptional circumstances (see PCG 2019/5), then S 118-200 ITAA 1997 allows for the calculation of a partial exemption as follows: –

A recent client example.

The question asked by the son is – We are concerned if we sell now, we will not get a fair value for our deceased mother’s home to share during the next 2 years, however, if we wait for the market to turn, we may expect $2M in say 3 years’ time. Can you help us understand the CGT Tax considerations?

The client’s facts to consider for CGT Partial PPOR Exemption – if settled after 2 years.

Purchase Price

• $520,000             15/06/2005 (the cost base of the deceased)
• Date of death     01/012/2021
• Fair Market Value at Death          $,1800,000
• The 2 Year Period, post-death 1st December 2021 to 30th November 2023
• If sold now or within the 2-year window expect $1.55M
• I wait 3 years expecting $2M, the date used for exercise is 15th November 2024
• What are the tax consequences of waiting to get a better price in 3 years?

Sell within the 2 years (CGT PPOR- Get Full Exemption)

• $1.55m
• Beneficiaries will benefit from the deceased mother’s PPOR exemption at the date of death
• CGT Exemption – no CGT 😊
• Though the FMV was $1.8m at the date of death, they now would get $250,000 less, ($1.8M -$1.55M (however CGT Exempt.

Sell at 3 Years (CCG Partial Exemption)

• $2.0m proposed sale price if they wait for the market to pick up.
• Total days held by the deceased mother until the date of death
  • 15/06/2005 to 01/12/2021 – 6013 days
  •  than during the 2 years after death 30th November 2023 – 730 days
    • Whether the home is rented or vacant will not affect the 2-year exemption. (See TD 1999/70) S 118-190(4), if sold within 2 years.
  • 30th November 2023 to 15th November 2024 – 351 days
  • Overall days 7,093 days
• PPOR days not the deceased PPOR
  • 5 years @365 days – 1,825 days (the mother rented the home back in 2010 for 5 years while living in another home as her PPOR, before returning to take up the home again as her PPOR).
• The original Cost base of purchase is now used for any CGT calculation, not the Fair Market Value at the date of death.
  • $520,000

Capital Gain Calculation

               $2,000,000 – $520,000 = $1,480,000

Partial Exemption

               $1,480,000 @ (1825 days (5 years rented previously) + 730 days (2 years post the date of death) + 351 days post the 2 years period / (total overall days held)

7,093 days

               $1,480,000 @ (1825 +730 + 351 days) / 7,093 days

$1,480,000 @ 0.4097

               $606,356

               50% discount $303,178 Capital Gains Tax

Net After CGT

$2,000,000 less CGT $303,178 = $1,669,822

Points to Consider –

• The longer the period over 2 years post-date of death of the deceased
• And the higher the gain over the deceased original cost base
• It may be less advantageous to trade the fully CGT Main Residence Exemption Against the exposure to the Partial Exemption based on the decease original cost base in pursuit of high sale prices.

In this example, it could be more trouble than it is worth to wait when the son will have to contend with applying only a partial CGT discount on their late mother’s home.

The need to investigate the history of the late mother’s home, instead of just accepting it as per PPOR just before the time of death.

Greater risk of ATO Audit if the property is sold outside the 2 years to ensure the beneficiaries have taken due consideration of the property’s history and the calculation to apply for the partial CGT exemption correctly.

Let alone the holding costs, and the opportunity cost of having this amount of funds not available to the sons for investing elsewhere.

Tax Tip

Need Help

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