How CGT applies to deceased estates

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As the saying goes, there are only two things certain in life: death and taxes. Dealing with a deceased estate means facing both.

Beneficiaries or legal representatives of a deceased estate will acquire the assets they are entitled to on the day the person passes away. Capital gains tax (CGT) does not apply upon acquisition of the asset, however, it may apply if you decide to dispose of the asset later on.

Regular CGT rules apply when selling an inherited asset other than a dwelling. For example, legal representatives may need to dispose of some or all of the assets of an estate when winding up a deceased estate. These assets are subject to normal CGT rules and any capital gain made by the legal representative on the disposal is subject to CGT.

Inherited dwellings that were the deceased’s main residence may be fully or partly exempt from CGT when selling or disposing of the asset. Dwellings inherited before 20 September 1985 are exempt from CGT upon their disposal. However, significant capital improvements made to the dwelling on or after 20 September 1985 may be taxable.

CGT may also not apply if the deceased acquired the dwelling before 20 September 1985 and died on or after 20 September 1985, even if the dwelling was not their main residence. CGT will not apply if either of the following conditions is met:

  • The beneficiary or legal representative disposes of the asset within two years of the person’s death. During these two years, the dwelling can be used as a main residence or to produce income.
  • From the deceased’s death until the disposal of the dwelling, the dwelling is not used to produce income and is the main residence of the deceased’s spouse, a beneficiary, or someone who had a right to live in the dwelling according to the deceased’s will.

For dwellings that were acquired by the deceased on or after 20 September 1985, beneficiaries or legal representatives can disregard any capital gain or loss made when selling it if either one of the following conditions applies:

  • The dwelling was passed to the beneficiary or legal representative on or before 20 August 1996, and both the beneficiary and deceased used the dwelling as their main residence.
  • The dwelling was passed to the beneficiary or legal representative after 20 August 1996 and is their main residence while they own it or dispose of it within two years. The dwelling also had to be the main residence of the deceased just before they died.
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