Capital Gains Tax liability for sale of deceased estate

Question

In 2009, my wife inherited her mother’s property in Williamstown, Victoria and paid out $174,000 in probate and estate costs. From June 2009 until now (March 2015) we have paid out around $16,000 in rates, bills and insurance costs to maintain the property during the long probate period and settlement of an insurance claim for structural damage. The property was formally valued at $465,000 for probate purposes in 2010.

In December 2014, we commenced a major repair and renovation to the property and have spent $93,000 to date and we expect to spend between $270 – $280,000 all up, finishing in September 2015. We hope and expect the property value after renovation to be around $800,000

Will my wife be required to pay CGT if she decides to sell the property after the renovation.

Answer

Some of the probate costs can be included in the cost base of the house if they relate to securing the title of the property. Refer ITAA 1997 section

110-25(6) ITAA 36

The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. (The expenditure can include giving property: see section 103-5.)


ID 2001/730 gives more detail:
http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2001730/00001

Any amounts paid by the estate in relation to the property are also included in your cost base. And of course any money you have spent is included in the cost base. Section 110-25(4) gives this a very wide interpretation including all holding costs. This of course is rates, insurance, repairs etc but also includes maintenance so can even cover light globes, gardening costs, cleaning materials etc.
The first element of the cost base is its market value at the date of your mother in law’s death.
The renovations are included in the cost base as improvements under section 110-25(5)
The selling costs are also included in the cost base.

The selling price less the cost base is how the Capital gain is calculated. If there is a capital gain it will be reduced by the 50% CGT discount.

By the looks of it your wife probably won’t be up for CGT simply because the property may not even make a capital gain once all the above are taken into account. It may not make a capital loss either because the items included under section 110-25(4) cannot be used to create a capital loss so there is a big area of no affect.

Certainly the property is subject to CGT it is just a question of whether there is any profit to tax. Do the numbers and work it out because it is important in your planning. If your wife has no other income then even a capital gain of $41,000 will not push her to pay tax after the 50% CGT discount is taken into account and if the gain is more than that she could consider contributing it to super (has to be done in the year she signs the contract to sell the property). She will have difficultly doing that once she is over 65 years of age so it is important to look at the numbers now.

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