Capital gains tax on sale of residence by a deceased person’s estate

Question

Roger and Irene purchased their residence in 1963 as joint proprietors. Irene died in 2009. Roger died in 2012 leaving a Will under which he left all of his assets, including his property equally to his three children Mary, Diane and Yvonne. Probate of his Will was taken out by Diane in 2012. The property was valued at $546,000 for probate purposes.

Roger’s Will made no specific reference to the residence and no special provisions, it simply left all of his estate equally to his three children. The Will however did include the standard provision giving the executor the power to postpone the sale calling in and conversion of the deceased’s estate for so long as the executor thinks fit.

Mary, the eldest daughter had lived at the deceased’s residence with the deceased for all of her life and suffered mental health problems following his death. Diane, the executor, resolved that it was appropriate for Mary to continue to live at the family home for as long as it was deemed necessary for Mary’s health and welfare.

Mary paid no rent during her occupancy of the property from 2012 to date. Mary had no specific right of residence under the terms of the Will, it was simply resolved by the executor Diane, with the agreement of the other daughter Yvonne, that it was necessary for Mary’s welfare that she be benefited by being giving rent-free occupation of the family home for as long as it was considered necessary.

Mary has now left the family home and the executor will be selling the property this year. The expected sale price will be in excess of $900,000.

The deceased’s estate has obviously lost the benefit of the standard two-year exemption from capital gains tax of the deceased principal place of residence and cannot point to any specific term of the Will authorising the ongoing occupation of the residence by one of the beneficiaries.

My questions are:
1. Despite the fact that the Will made no specific gift of a right of residence to Mary, is there any possibility of seeking an exemption from capital gains tax on the basis of the occupation of the property by one of the beneficiaries of the estate?
2. If the property is not exempt from capital gains tax, what capital gains tax will be payable by the estate upon the sale of the property and how will it be calculated?

Answer

It sounds to me like you are well read on section 118-195 but let’s just go over it. Here is the link http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.195.html unfortunately I can’t get the layout to work properly here. Please click on the link so you can get the context on the following. I want to draw your attention to following concessions for when the capital gain will be disregarded:
the * dwelling was, from the deceased’s death until your * ownership interest ends, the main residence of one or more of:
(a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or
(b) an individual who had a right to occupy the dwelling under the deceased’s will; or
(c) if the * CGT event was brought about by the individual to whom the * ownership interest * passed as a beneficiary–that individual

I have seen a family successfully apply to the ATO for a ruling as to whether they were entitled to apply (b) because while the will did not express it, all the siblings were well aware that it was their parent’s wish that their handicapped child continue to live in the house after the parent died. The ATO accepted this. I was shocked. Maybe the ATO have a heart after all.
So that would be my first course of action apply to the ATO arguing that it was your parent’s clear intent and they did not see a reason to put it in their will. So that you don’t compromise Mary’s ability to use (c) make sure it is clear that all the daughters agreed to put the house on the market or for that matter that Mary was the one making the decision.

If the ruling fails then at least the Mary’s share of the proceeds will have no CGT if she continues to live there up until it is sold. That is what subsection (c) is saying. The remaining siblings will have their cost base start at their share of the market value at DOD assuming deceased home and not being used to produce income at that time. This is increased by their 1/3rd share each of any holding costs the estate has paid in that time, section 110-25(4) and I mean any holding costs not paid by Mary. Could be lawn mower fuel, cleaning materials, repairs, rates, insurance etc. There is also a portion of the probate costs that could be included and of course their share of the selling costs. Then they get the 50% CGT discount.




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