Tax Q&A: Your Tax Questions On Selling A Property And More
Q: Can you help me with the tax laws in the following scenario, regarding passing on real estate assets and tax liabilities?
Person A purchased real estate (land + house) in 1981 and used it as an investment property.
Person A died in 1998, leaving the investment property in her will to her sister, Person B, who continued using it as an investment property.
Person B died in 2015, leaving the investment property in her will to her son, Person C, who continued using it as an investment property.
Person C had the property valued upon Person B’s death.
Person C then sold the property in 2016, 12 months after acquiring ownership of it.
How is capital gains tax viewed or calculated in this scenario?
A: Generally, an inheritance of assets such as property and shares is capital gains tax (CGT) free in the hands of the recipient upon probate.
In your particular situation, since the property has passed hands between various beneﬁciaries I will take it one step at a time.
Person A acquired the investment property prior to 20 September 1985, and this therefore is a pre-CGT asset.
When Person B inherited the property in 1998, the capital cost base, for tax purposes, was adjusted to the market value of the property upon Person B inheriting the property in 1998.
From 1998, this property ceased to be a pre-CGT asset.
When Person C inherited the property in 2015, he also inherited the capital cost base of the property from 1998. As Person C also used the property as an investment property, the valuation that was done in 2015 is irrelevant for tax purposes.
When Person C sold the property in 2016, the capital gain on the property would
have been the difference between the sale price in 2016 and the market value when Person B inherited the property in 1998.
As the property was held for more than 12 months (18 years in fact, for tax purposes, even though it was held in the family for 35 years), Person C will be entitled to the CGT 50% general discount concession (assuming he is an Australian resident for tax purposes and the property is not held in a company).
CGT is then payable on the remaining 50% at Person C’s marginal income tax rates.
For example, if the property was worth $300,000 in 1998 and the sales price in 2016 was $900,000, then this would mean a capital gain of $600,000.
After applying the CGT 50% discount concession, the taxable capital gain would be $300,000, which falls into the top marginal income tax rate of 49% (including the Medicare levy and Temporary Budget Repair levy for taxable incomes above $180,000 for the 2016/17 tax year). Therefore the CGT would be close to $115,000, based on current ATO income tax thresholds.
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