Selling an Inherited Property? Here’s What You Need to Know About CGT

Inheriting a property from a deceased estate can come with unexpected tax implications, particularly when it comes to Capital Gains Tax (CGT).

One of the most important rules to understand is the 2-year rule, which can allow you to sell an inherited property without paying CGT. However, this exemption is not always straightforward, and missing key requirements can result in significant tax consequences.

What is the 2-Year Rule?

Under Australian tax law, the 2-year rule allows a beneficiary or trustee of a deceased estate to disregard any capital gain or loss on the sale of an inherited dwelling, provided it is sold within 2 years of the date of death.

To qualify for this exemption:

The property must have been the deceased’s main residence and not used to produce income just before their death, or the property was acquired by the deceased before 20 September 1985 (pre-CGT)

If these conditions are met and the property is sold within the 2-year timeframe, CGT will generally not apply.

Can the 2-Year Period Be Extended?

As of April 1st, the Commissioner of Taxation has the discretion to extend the 2-year period where the property could not be sold within that timeframe due to circumstances beyond your control.

In general, an extension is more likely to be granted where:

• The delay occurred for a significant portion of the initial 2 years, and

• The reasons for the delay were outside the control of the executor or beneficiary

However, it’s important to note that this extension is not automatic and may require justification.

The “Safe Harbour” Approach

In some cases, you may not need to formally apply for an extension. The ATO provides a safe harbour that allows you to treat your situation as if an extension has been granted (for up to 18 additional months), provided certain conditions are met.

To qualify, all of the following must apply:

• Delays in the first 2 years: More than 12 months were spent dealing with issues such as:

• Legal challenges to the will

• Life tenancy arrangements

• Complex estate administration

• Prompt action: The property was listed for sale as soon as practicable after those issues were resolved

• Timely sale: The property was sold within 12 months of being listed

• Time limit: The total period does not exceed 42 months from the date of death

If these criteria are satisfied, you can rely on the safe harbour without needing to seek formal approval from the ATO.

When Will the ATO Grant an Extension?

Where the safe harbour does not apply, the Commissioner will consider a range of factors when deciding whether to grant an extension. Favourable factors include:

• Disputes over the will or ownership of the property

• Delays due to complex estate arrangements

• Situations where the property is tied to other financial arrangements (e.g. used as loan security)

• External events such as COVID-19 impacting the ability to sell

• Adverse factors include:

• Deliberately delaying the sale to wait for the market to improve

• Undertaking renovations to increase the sale price

• Periods of inactivity or lack of effort to sell the property

What Happens If You Don’t Meet the Requirements?

If the property is not sold within 2 years and no extension is granted, CGT may apply.

In this case:

• The property’s market value at the date of death is generally used as the cost base

• Any increase in value from that date to the date of sale may be subject to CGT

This can result in a significant and unexpected tax liability, particularly if the property has increased in value.

What Does This Mean for You?

Managing an inherited property is an emotional process, that unfortuantely requires careful tax planning.

Deceased estates and CGT rules can be complex, and getting it wrong can be costly. Whether you’re managing an estate, planning to sell an inherited property, or unsure if you qualify for an exemption, professional advice can make all the difference.

At Addition Accounting, we can help you understand your obligations, assess your eligibility for CGT exemptions, and guide you through the process with confidence.