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Inherited dwelling CGT question...


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#1 CallMeFeral

Posted 19 June 2019 - 01:56 PM

Just on the offchance that anybody knows.

I gather an inherited dwelling that was a parents primary residence remains CGT exempt beyond the 2 year limit if the beneficiary keeps staying in it as their primary residence.

What happens if there are 3 siblings who are joint beneficiaries - and one of them is the one staying in it? Does it still apply to the entire house? Or would it only be CGT exempt for the sibling remaining in the house? Or would it not be CGT exempt for anyone?

Have an acquaintance going through this issue and very stressed by the demise of parents and having to sell her home (she lived there with them) while still dealing with grief. I'm wondering if she's been misinformed on the necessity of moving. I'm not close enough to the scenario to seek legal advice myself, but if she's been misinformed could ask her to think about getting a second opinion, as it would reduce a lot of her stress if she is not bound by the 2 year limit.

#2 Chamomile

Posted 19 June 2019 - 02:01 PM

Have the 3 siblings inherited a third each?
And only one of them is living in the house?

#3 JRA

Posted 19 June 2019 - 02:13 PM

My recollection is that if the other two are not living there, they would then have the CGT implications if the house is not sold within the two years, and they live in it (from a CGT perspective).

So they would have capital gains for a 1/3 each of the capital gains with CGT event being the date of death, and the capital gain the value at that time compared to the date of sale.

but that is just my recollection, I am not qualified in this area.

#4 born.a.girl

Posted 19 June 2019 - 02:13 PM

There are possible complexities in the actual details of this case which may influence peoples' responses, including when the house was originally bought.

Surely they've engaged a solicitor?  It won't be worth any saving if they muck up the CGT considerations.

#5 CallMeFeral

Posted 19 June 2019 - 02:20 PM

View PostChamomile, on 19 June 2019 - 02:01 PM, said:

Have the 3 siblings inherited a third each?
And only one of them is living in the house?

Yup.

View Postborn.a.girl, on 19 June 2019 - 02:13 PM, said:

Surely they've engaged a solicitor?  It won't be worth any saving if they muck up the CGT considerations.

Yeah, I think that's why they are trying to sell. I'm unclear on whether they have consulted a specialist in this area or are just being advised by whoever is executing the will.

JRA - ok that makes sense. So if she doesn't sell, it's impacting her siblings inheritance. Bugger. I feel like that law needs a rethink!

#6 Mollyksy

Posted 19 June 2019 - 02:37 PM

Is she paying rent to the siblings for their 2/3rds? That will effect it too I'd think. When was the property purchased? It's a date in the eighties I think if bought before CGT brought in and no improvements made after the CGT date then I think it's not payable. They need an accountant to confirm.

The other consideration is CGT is calculated on the price of the asset on date of death v price sold. Has the price dropped in value? If so, there will be no capital gain, it's a loss that can be offset against the gains from other capital sales in that financial year, and sometimes a loss can be carried forward.

They really need an accountant to advise on their specific circumstances.

#7 JRA

Posted 19 June 2019 - 02:37 PM

Quote

JRA - ok that makes sense. So if she doesn't sell, it's impacting her siblings inheritance. Bugger. I feel like that law needs a rethink!

There is no guarantee AT ALL I am right. So she should check with the right solicitor/accountant.

The obvious thing is for her to buy out her siblings before the 2 years is up. This is what most people I know in this situation have done.

Edited by JRA, 19 June 2019 - 02:37 PM.


#8 Mollyksy

Posted 19 June 2019 - 02:38 PM

Who is executor? Did they give permission for sibling to live there? (Assuming estate not yet finalised)

#9 born.a.girl

Posted 19 June 2019 - 02:52 PM

CMF I only have rough knowledge of the area, and really only for straightforward cases, but if you read the following, and IF I'm reading it correctly:

https://www.moneyand...principal-home/


... AND the house was bought after 1985, then there's a chance the two non-resident siblings will be up for CGT from the original price, IF it's not sold within the two years.


If this article is correct, the purchase date is extremely important for the other two siblings.

They really need to shoot some specific questions to their solicitor and get clarification.

This isn't a job for an amateur executor.  Even with my MIL's relatively straightforward will, there were grey areas that I'd not previously encountered, and we needed an accountant who knew the area, to tell us what the ATO would and wouldn't accept.


Eg: when my mother's estate was invested to wait the six months before distribution, the interest was declared in the estate tax return.

If we had done the same with my MIL's the interest would have had to have been declared in the names of the individual beneficiaries.

The difference is a large grey area that involves consideration of the facts in each case.

#10 CallMeFeral

Posted 19 June 2019 - 03:56 PM

View PostJRA, on 19 June 2019 - 02:37 PM, said:

The obvious thing is for her to buy out her siblings before the 2 years is up. This is what most people I know in this situation have done.

That's a good point. I wonder if they've been advised of this option. I'm getting the impression all they've been told is "you have to sell in 2 years or else you pay 50% of the value of the property when you sell"

View PostMollyksy, on 19 June 2019 - 02:38 PM, said:

Who is executor? Did they give permission for sibling to live there? (Assuming estate not yet finalised)

I believe so, the sibling has been living there for the last 15 years, and the other siblings are close so there's no conflict/fight about it - I think all would be happy for her to stay there - except for the threat of losing a chunk of the property if they sell.

I think I'll encourage them to see a specialist in this area.

#11 Holidayromp

Posted 19 June 2019 - 03:58 PM

That is going to be quite messy.  Good luck on that one.

Will be interesting how it pans out.

Its also going to be dependant on the sibling living in the house playing ball too.

But a pp upthread has made a valid point.  Is the one actually in the property paying rent?

#12 CallMeFeral

Posted 19 June 2019 - 08:23 PM

View PostHolidayromp, on 19 June 2019 - 03:58 PM, said:

But a pp upthread has made a valid point.  Is the one actually in the property paying rent?

No, the sibling living in the house isn't paying rent.

#13 Holidayromp

Posted 20 June 2019 - 10:36 AM

View PostCallMeFeral, on 19 June 2019 - 08:23 PM, said:



No, the sibling living in the house isn't paying rent.

How are the other siblings feel about that

Are they paying all maintenance, rates etc?

#14 born.a.girl

Posted 20 June 2019 - 10:43 AM

View PostHolidayromp, on 20 June 2019 - 10:36 AM, said:

How are the other siblings feel about that

Are they paying all maintenance, rates etc?


That's not really the issue is it?  CMF has said everyone's happy with the situation, close family etc.  The only issue is the impact of CGT if not sold within the two years, not any angst between the siblings.

It could be significant, too, if the house was bought after 1985 and the CGT calculation goes way back to the original purchase price.

#15 JRA

Posted 20 June 2019 - 10:53 AM

.

Edited by JRA, 20 June 2019 - 10:54 AM.


#16 born.a.girl

Posted 20 June 2019 - 11:01 AM

View PostJRA, on 20 June 2019 - 10:53 AM, said:

.


That's what I would have assumed, too.  The article I linked too, though, suggests that's only relevant if sold within the two year time frame.

If bought after mid eighties AND not sold within the two year time frame, then the cost base is the original cost base, according to the article.


The article could of course be incorrect.

The ATO also allow extensions to the two year time frame:
https://www.ato.gov....nership-period/



ETA: this except from the article: (my bold)

Quote

Scenario 2: Ted’s mother purchased her main residence on or after 20 September 1985
If the property was his mother’s main residence at the date of death, what are the CGT implications for Ted if he plans on disposing of the property:
  • within two years from the date of death of his mother?
  • after two years from the date of death of his mother?
For the two-year disposal concession period to apply, because this was originally a post-CGT asset, there is a requirement that Ted’s mother had lived at home and had not rented out her home on her date of death. So long as he sells it within this concessional period, it’s irrelevant whether he has lived in the home or has rented it out during his period of ownership.
If Ted sells the property after two years, then CGT may apply with the cost base being the same as his mother’s original purchase price. There is no CGT pro-rata exemption for the first two years and the 50 per cent general CGT discount applies from her original date of purchase.


I'd love someone to come and tell me this is wrong, because it sounds so illogical to me.  That said, extensions are available for valid reasons for delay.

If it's true, it certainly highlights why people should get legal advice for all but the simplest of estates.

Edited by born.a.girl, 20 June 2019 - 11:56 AM.


#17 SplashingRainbows

Posted 20 June 2019 - 06:55 PM

Hi born.a.girl!

I think this is the information you are missing, regarding partial exemptions.

https://www.ato.gov....rited-dwelling/

OP the people involved need a really really good tax accountant. I know a lot who would get the advice wrong. She should not ask the estates solicitor for tax advice. A tax lawyer would give the right advice but they’re few and far between (and costly!).

#18 SplashingRainbows

Posted 20 June 2019 - 06:57 PM

CMF

This link is pretty helpful. Each beneficiary should answer the questions from their perspective.

https://www.ato.gov....ited-dwellings/

#19 Chamomile

Posted 20 June 2019 - 09:34 PM

Does everyone think this is correct?

Assume house is worth $1m today.
Assume in 5 years time it is worth $1.2m, when it is sold.

Then the sibling who lives there receives $400k and pays no CGT.

The other siblings each receive $400k. Their capital gain is $66k each (one third of $200k).
Apply 50% cgt discount = $33k.
If income tax rate is 50%, then tax to pay is $16.5k.

Any gentle feedback welcome :)

#20 spannerset

Posted 20 June 2019 - 09:48 PM

Chamomile that’s correct - that situation will only come about though if property was purchased pre-1985. Otherwise the cost base will be the purchase price plus any renovations/improvements. The assessable gain is then worked out with a “number of days” calculation apportioning the total gain over the exempt (main residence) and non-exempt periods.

A good tax accountant should easily be able to work through all the different calculations for the different owners.

Edited by spannerset, 20 June 2019 - 09:50 PM.


#21 SplashingRainbows

Posted 20 June 2019 - 09:49 PM

The calculation for a post 1985 property will be different to that.




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