Deceased Estate where home rented at DOD

Question

I would like to request for Taxation advice including applicable CGT (for the beneficiaries) after selling my Mother in Law’s house in Perth as executor of her will.

Background information

  • Property location – Perth. Bought by my mother-in-law (Mum) and father-in-law September 1988. My father-in-law passed away about 10 years ago after which the title was changed to Mum’s name.
  • Mum passed away on 30th Oct 2024 at the age of 90 and was a pensioner till then.
  • Mum lived in the house from 1989 till we rented it out starting 15th August 2024, to pay for her care. She moved out of the property to her daughters’ house as she was too old to live on her own.
  • The property was bought on 2/09/1988 for $ 93,500 and estimated sale price now is $950,000.
  • Property title – In Mum’s name. We have not yet changed the title to the beneficiaries (her 3 daughters) as the intent is to sell within 12 – 24 months (after she passed on 30/10/2024) and not worth big effort to restructure the loan.
  • The mortgage with the bank is in 3 names. Mum and Daughter 1 and Daughter 2.
  • The beneficiaries of her will are Daughter 1, Daughter 2 and Daughter 3.
  • Rent – The property has been generating rent since 15/08/24.
  • I have received the Probate (as executor) in Jan 2025.
  • The property is ready for sale from a document perspective – all name discrepancies have been addressed by a settlement agent/ lawyer this week. We intend to sell within 12 months from now

Queries from an after-sale CGT (for the beneficiaries) perspective

  1. CGT – Implications of selling < 12 months after Mum passed away.
  2. CGT – Implications of selling 12- 24 months after Mum passed away – if different from above.
  3. CGT implications of selling > 24 months to 6 years – after Mum passes away.
  4. Please advise if the 6 year rule allows exemption from CGT in the above cases.

Queries from an annual tax return perspective

  1. Does Mum need to file a tax return (rental income) in the Fin year 2024 2025 (noting the dates in green font above) If yes, when is this due ?
  2. Do the beneficiaries (all 3 or only the two who’s names are on the mortgage ?) need to include rental income/ deductibles in their tax returns for this property from the day Mum passed away?
  3. We spent approximately 25 k in repairs, not improvements (From April 2024 to Aug 2024 – have all the receipts) to get the house ready to rent. How is this best managed to claim a deduction in the Fin year 25/26 in relation to point 4 and 5 above. Noting that
    • While some of the costs were incurred in the fin yr 24/25, income only commenced in the year 25/26.
    • The expenses were paid for by the beneficiaries.
  1. How is this treated from an income tax deductable perspective between Mum, Daughter 1 and Daughter 2. Noting that the title was/is currently in Mum’s name and the loan is in 3 names (Mum, Daughter 1 and Daughter 2).
  2. Given the following how is each one (Mum and the 3 daughters treated from an annual tax perspective)
    • Title still in the name of the deceased- However we have the will attached to the probate and attested by Landgate stating the beneficiaries of Mum’s estate . Because we intend to sell soon, we are not changing the title as it will be a complex process to restructure the loan.
    • Loan is in the name of Mum, Daughter 1 and Daughter 2 . How is the interest managed (as a deductible) for the 3 beneficiaries ?
    • Will beneficiaries – Daughter 1, Daughter 2 and Daughter 3.
  3. Any other annual tax return considerations ?

Please let me know if you need anymore information or clarification to answer my queries above.

Answer

Three key points before I address your questions:

  1. It does not matter where the mortgage is secured it is what the borrowed money is used to buy that determines whether the interest is tax deductible.  Considering the purchase date of the house I doubt this loan is for the original purchase price so unlikely the interest on it can be claimed as a deduction against the rent.  If maybe it was for improvements to the house then you can consider the interest as a tax deduction.  Further if those improvements were done after 16th September, 1987 2.5% of their costs may be claimable against the rent each year under Div 43 building depreciation.
  2. The estate is a separate legal entity from the beneficiaries and the deceased.  There is a tax return for the deceased up to the date of death and another tax return with a different TFN for the estate.  Both tax returns get the full tax free threshold each. 
  3. Section 118-195 ITAA 1997 allows the estate or beneficiaries 2 years to sell the deceased’s home without attracting CGT, even longer if there have been barriers to selling beyond your control.   The house would still be considered the deceased’s home at DOD section 118-190 ITAA 1997 makes it clear that the 6 year rule section 118-145 ITAA 1997 can apply to continue to cover the property with the deceased’s main residence exemption when they move out.

So now in answer to your questions as per your numbers


Queries from an after-sale CGT (for the beneficiaries) perspective

  1. CGT – Implications of selling < 12 months after Mum passed away.  
    • Whether the property be in Mum‘s name or the estate or the beneficiaries there are two years from DOD to settlement date where the sale of the property will not be subject to CGT.  Reference section 118-195 ITAA 1997
  2. CGT – Implications of selling 12- 24 months after Mum passed away – if different from above.   
    • Not different just make sure settlement date is within the 2 years though the ATO is likely to grant an extension if you just fall short.
  3. CGT implications of selling > 24 months to 6 years – after Mum passes away.  
    • Assuming do not have good reason to apply for an extension then the 2 years is all or nothing.  If miss the deadline then the CGT will be calculated on the gain starting with the first element of the cost base being market value at DOD, reference 128-15 ITAA 1997.  There is no apportioning of the time to allow for the 2 years, it is lost.
  4. Please advise if the 6 year rule allows exemption from CGT in the above cases.  
    • Six year rule will only work up until DOD.  After that it is 118-195 that just gives you the 2 years to sell because it was still considered her home even through she did not live their at time of dying

Queries from an annual tax return perspective

  1. Does Mum need to file a tax return (rental income) in the fin year 2024 2025 (noting the dates in green font above) If yes, when is this due ?   
    • No dates in green font.  I think you are referring to the fact that the property was only rented for 2 months before Mum died.  She only needs to lodge a tax return if tax has been withheld from a payment or her taxable income is high enough to generate a tax liability.  If her income is only pension and 2 months rent I doubt it is required.  But if it is required 31-10-2025 unless you are on a tax agent’s lodgement program.
  2. Do the beneficiaries (all 3 or only the two who’s names are on the mortgage ?) need to include rental income/ deductables in their tax returns for this property from the day Mum passed away?  
    • It is an estate tax return.
  3. We spent approximately 25 k in repairs, not improvements (From April 2024 to Aug 2024 – have all the receipts) to get the house ready to rent. How is this best managed to claim a deduction in the Fin year 25/26 in relation to point 4 and 5 above. 
    • TR 97/23 in the Mary Ellen example would not consider repairs made to a property to prepare it for rental after being used for private purposes, to be tax deductible.   Section 110-25(4) does not allow repairs and maintenance to increase the cost base of properties purchased before August 1991, only improvements.  But this does not matter in the end because the cost base you will start with is market value at DOD so hopefully that reflects the value of the improvements. 
    • Noting that
      • While some of the costs were incurred in the fin yr 24/25, income only commenced in the year 25/26.   
        • You said that the property was rented out in August 2024 so there is rental income in the 24-25 financial year but as above can’t be repairs relating to when it was Mum‘s home.
      • The expenses were paid for by the beneficiaries.   
        • If this property does end up subject to CGT the repairs made after DOD can be included in the cost base for CGT purposes because it is no longer a pre 1991 property
  4. How is this treated from an income tax deductable perspective between Mum, Daughter 1 and Daughter 2. Noting that the title was/is currently in Mum’s name and the loan is in 3 names (Mum, Daughter 1 and Daughter 2). 
    • I doubt this interest is tax deductible unless it is for renos done to the property as it couldn’t be the original loan and you are saying the daughters paid for the recent repairs.  If there is a nexus between the borrowed money and the property then ideally there should be an on lend agreement from daughter’s to Mum but if the facts are the money was spent on the house and the owner of the house made the loan repayments then the interest is deductible by the owner of the house which will be Mum up to DOD and the estate after that.  You might want to get back to me to clarify this issue.
  5. Given the following how is each one (Mum and the 3 daughters treated from an annual tax perspective)
    • Title still in the name of the deceased- However we have the will attached to the probate and attested by Landgate stating the beneficiaries of Mum’s estate . Because we intend to sell soon, we are not changing the title as it will be a complex process to restructure the loan.   
      • The property is included in Mum‘s tax return up to DOD and then the estates.
    • Loan is in the name of Mum, Daughter 1 and Daughter 2 . How is the interest managed (as a deductable) for the 3 beneficiaries ?  
      • Just to Mum or the estate though the ATO could get picky about whether Mum paid all the loan etc that is why an onlend agreement is advisable. 
    • Will beneficiaries – Daughter 1, Daughter 2 and Daughter 3.   
      • It will be in the estate from DOD unless the beneficiaries become presently entitled and then in the case of presently entitled the net rent will be distributed from the estate tax return into each daughter’s tax return.  Presently entitled is generally defined as – either they actually received the money before 30th June or it is the final year of the estate.
  6. Any other annual tax return considerations ?

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.

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