Ask Ban Tacs Question
We are in need of some guidance on the CGT implication on the sale of an inherited Principle Place of Residence.
To facts of the case are below:
- Mother passed away within her PPOR
- Date of Mothers death was 01/02/2017
- PPOR was purchased/built in the 1970s from the memory of the Son.
- No Confirmation of Purchase price or date is available
- Market Value within the Probate Property Inventory was $1,550,000
- PPOR was Inherited by a Son and Daughter 50/50
- After Death the property was not sold.
- From Date of Mothers death (01/02/2017) to 31/01/2019, the Daughter resided within the Property as her home, as she had no other PPOR to live in.
- The Property was eventually vacated by the Daughter and renovated, before being tenanted by a 3rd Party on the open market from 30/08/2019 up until the sale of the Property in October 2025.
Is there any scope for the Daughter to have an adjusted cost base (say, using the market value substitution method upon vacating on 31/01/2019 – as well as applying the 6 year main residence exemption after vacating ) due to her living within the Property and extending the PPOR status of the property?
I assume the Son’s capital gain calculation cannot extend the PPOR status as he had a PPOR of his own from the Date of death on 01/02/2017 to the sale of the property.
Can the Capital Gain Calculation be different for the Son & the Daughter, given the Daughter lived in the Property and was a 50% owner?
Or, as the property is jointly owned by siblings, does the CGT calculation become uniform across both parties and no PPOR status can be provided to the Daughter for her CGT calculation?
Follow-Up Question from Julia
Can I assume that at some time the estate was wound up and the property put into the children’s names so they are now the ones selling it in their own right not as executors?
Follow-Up Answer
Correct, estate was wound up and property transferred to the Son & Daughter’s name, selling in their own right as the owners.
Answer
The first step is section 128-15 ITAA 1997 that resets the cost base to market value at the date of your mother’s death. No need to know the original purchase details because everything before date of death is ignored. This is the case because it was the mother’s home at DOD. It also applies to pre CGT assets but there is a possibility only half of the property is pre CGT. The other half she may have inherited from her husband post CGT. No matter, the fact that it was her home when she died will trigger the reset anyway.
So we start from 1-2-2017 with a first element of the cost base of $1,550,000.
Son and daughter are treated differently, consider the house to be two separate assets.
The trick here is in section 118-195 so I give you the full detail below:
Subdivision 118-B – Main residence
Dwellings acquired from deceased estates
SECTION 118-195 Dwelling acquired from a deceased estate
A * capital gain or * capital loss you make from a * CGT event that happens in relation to a * dwelling or your * ownership interest in it is disregarded if:
(a) you are an individual and the interest * passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and
(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied; and
Beneficiary or trustee of deceased estate acquiring interest Item One of these items is satisfied And also one of these items 1 the deceased * acquired the * ownership interest on or after 20 September 1985 and the * dwelling was the deceased’s main residence just before the deceased’s death and was not then being used for the * purpose of producing assessable income your * ownership interest ends within 2 years of the deceased’s death, or within a longer period allowed by the Commissioner . 2 the deceased * acquired the * ownership interest before 20 September 1985 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
(c) the deceased was not an * excluded foreign resident just before the deceased ‘ s death.
It is important to note that either of the situations in column 2 can link to either of the situations in column 3. It is not just a straight line.
The daughter can take advantage of the area highlighted in pink to cover the property with her main residence exemption.
Here is section 118-145 ITAA 1997 – the 6 year rule:
SECTION 118-145 Absences
118-145(1)
If a * dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.118-145(2)
If you use the part of the * dwelling that was your main residence for the * purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.118-145(3)
If you do not use the * dwelling for that purpose, you can treat it as your main residence under this section indefinitely.
It is 6 years while it is earning income. If it is not earning income then the period is infinite. So while the renos were being done she can still cover it with her main residence exemption and the 6 years does not start until 30-8-2019. She is just exposed to CGT for 2 months!
The daughter’s cost base is reset again by section 118-192 when the property is first used to produce income because from the time she inherited it to the time it was first rented it was fully covered by her main residence exemption thanks to 118-145 allowing it to be covered while she is not living there during the renos. Section 118-192 also resets the date acquired so she cannot include anything in her cost base before 30-8-2019. So her ownership period for the purpose of the CGT calculation would only be 74 months. Her CGT calculation would look like this:
- Half market value as at 30-8-2019
- Plus half selling costs
- Less half any depreciation on renos
- Plus any costs not otherwise claimed as a tax deduction against the rent
- Deduct this from half the sale proceeds to get the capital gain.
Now for simplicity I am going to say this is $100,000. The taxable amount would work like this:
| Gross capital gain | $100,000 |
| Portion exposed to CGT | |
| 2 months / 74 months | 2.7% |
| Taxable portion | $2,700 |
| Less 50% CGT discount | $1,350 |
| Net capital gain | $1,350 |
I am assuming that the daughter has no other place she wants to cover with her main residence exemption. Note this is assuming she actually paid half of the selling costs and half of any other holding costs not claimed against the rent.
Now there is a little window of opportunity here for the son, if there is any suggestion in the will that the daughter had a right to occupy the house then CGT does not start to apply until after 31-1-2019. See highlight in blue. This means his half of the CGT calculation will still look at the capital gain from date of death but it will be apportioned on a pro rata basis 2 years / 8 years and 8 months = 24/104 months = 23% of the gain not taxable representing the time someone who at a right to live there under the will, lived there. I thought this worth mentioning just in case.
Failing the above the Son’s CGT calculation would look like this:
| Half $1,550,000 | $775,000 |
| Add half cost of renos | |
| Less half any Deprn on renos | |
| Add half holding costs while not | |
| Rented ie rates, insurance, repairs | |
| And maintenance since DOD | |
| Add half Selling costs. |
This amount is the total cost base which is deducted from half the sale proceeds to determine the capital gain then the 50% CGT discount is applied.
It is important to note that these costs I list can only go in the son’s cost base if he or the estate incurred them. If say the sister paid all outgoings while she was living there, he cannot include them in his CGT calculation.
It is important that the son paid half of the price of the renos for him to include them in his cost base but not for the daughter because she has a reset after the renos were finished. Note if the son paid for all of the renos he can include all of the cost in his cost base.
I attach a spreadsheet that explains the elements of the cost base in detail.
Note while I have used months in my example, to keep it simple, the actual calculation must count the number of days.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.
