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Hello, my brother and I are considering buying a house with our elderly parents so they can move and live closer to us. The title to the land and house will be under our parents name, but we will help fund part of the cost by accessing equity in our existing properties, respectively. The remainder will be funded by our parents by selling the home they live in now. Essentially, there will be no mortgage on the new house. The intention is that our parents will live in this house until they pass away. I understand that inherited properties do not attract capital gains tax provided certain conditions are met (must be sold within 2 years and was the PPOR for our parents before they passed). My question is, will the ATO consider the inherited property as an investment property if at the time of disposal, or date of the sale contract, both my brother and I still own a PPOR property each and therefore we have to pay CGT on sale of our parents home? Or is there a way we can structure the arrangement so that we can avoid, or minimise the amount of CGT payable?
Answer
You are spot on with this arrangement, the best you can do under the circumstances. So here is how it works within the law.
Property is covered by the CGT main residence exemption if it is the PPOR of the people on the title.
I gather the ownership will be in joint tenancy so when one parent dies the other becomes sole owner. I am assuming no one is going to be a non resident for tax purposes at any time.
When the final parent dies section 128-15 kicks in to reset the cost base to market value at DOD. Nothing can unsettle this reset so so far so good. Just be careful that it is not earning income if they are still living there when they die. It is ok if they are not living there while it is earning income ie living with you and it is rented out as long as this is for no longer than 6 years as per section 118-145 ITAA 1997
Now back to section 128-15 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/128-15 in particular
So from the DOD of the last parent you have reset the cost base to the market value at that time. When you sell you add all the selling costs to this market value also the holding costs such as rates and insurance. This total cost base is then deducted from the Selling Price to see if there is any capital gain. Selling costs probably mean if you sell reasonably quickly there will be no CGT anyway but also section 118-195 ITAA 1997 allows you two years to sell (longer if circumstances beyond your control slow down the process, it is DOD to settlement date) without paying any CGT. If you go over the 2 years then it is back to the market value at DOD plus selling and holding costs as the cost base you deduct from the sale proceeds. Note the actual capital gain that you pay tax on will be 50% of the figure discussed above because you will be entitled to the 50% CGT discount because it is more than 12 months since your parent’s purchase the house, it is not a case of 12 months since DOD. Of course, the longer you go on you also have the disadvantage of any capital gain not being taxed in the estates hand but instead added to you and your brother’s taxable income. It is probably better that the estate is the one to sell the house because for the first 3 tax returns after death the estate is entitled to the normal tax free threshold, usually $18,200 then the step up tax rates of any adult taxpayer. This will probably result in less tax being paid over all. That is unless say your brother and you are retired and your only income is tax free superannuation then best to move the house out of the estate before you sell it so that you get to split the gain between both of your $18,200 tax free thresholds. Transferring it out of the estate into your names will not restart the 12 months for the 50% CGT discount.
In short there are no negative tax consequences of your arrangement. Selling past 2 years is not a deal breaker to the most important concession in Section 128-15 ITAA 1997 of resetting the cost base to market value at DOD.
