Dealing with Property in a Deceased Estate

Introduction

When dealing with a property that forms part of a a person's estate after death, there are some matters that require close attention, including the possibility of land tax payments and Capital Gains Tax (CGT) implications. There are also different time limitations that the executors and administrators need to be aware of, from both the State Revenue Office (SRO) and the Australian Taxation Office (ATO).

The types of taxes that might be payable will depend on whether the relevant property was being used as the deceased owner's principal place of residence (PPR), or if the property was an investment property.

Land Tax

Principal Place of Residence (PPR)

If the property was used as a PPR immediately before the registered proprietor's death, then the property will continue to benefit from the PPR land tax exemption for three (3) years from the owner's death (and, if any further extension applies, until the expiry of that exemption). Notwithstanding the three-year time limitation, the exemption will lapse if the deceased's interest in the property vests in the beneficiary of the Will, or if the land is sold or transferred to a new owner.

Investment property

If the property was used as an investment property immediately before the deceased's death, then the property will continue to be liable for land tax. However, the State Revenue Office (SRO) will assess land tax to be paid at the general tax rate rather than the land tax surcharge (applies to properties held on trust, such as held by the legal personal representative). Land tax will be exempt from the surcharge rate for three years from the date of death, or until administration of the deceased estate is complete.

Capital Gains Tax (CGT)

The ATO provides a two-year (2) time period whereby the deceased owner's PPR will continue to be exempt from CGT on the sale of transfer of the property. Accordingly, CGT will not be payable upon the sale of the property to an arms-length purchaser.

Importantly, if the property was not sold or otherwise disposed of within the two-year time period, the sale of the property may still still be CGT-free if the property has remained at all times:

1. The main residence of the deceased's spouse; or
2. The main residence of an individual who has a right to reside in the property pursuant to the Will; or
3. The main residence of a beneficiary who inherited the property pursuant to the Will.

Importantly for points 2 and 3 above, the right to reside and the right to inherit must be pursuant to the Will. For example, the registered owner of the property records in his Will that his mother has the right to reside in his principal place of residence for 15 years before it is sold. Upon the sale of the property after 15 years the property will remain CGT exempt if it was the mother's primary residence for that 15-year period. However, if the deceased's siblings had formally agreed that their mother may reside in the property for 15 years (and this was not recorded in the Will), then this may raise a CGT liability upon the sale of the property.

If the property is not sold or otherwise disposed of within the two years, and no extension applies, there will likely be a CGT liability on the sale of the property calculated on the amount of the time that has passed from the two-year exemption period.

It is important to note that if the property was used as the deceased owner's primary residence and it is disposed of within two years of their death, CGT will not apply even if the property was producing some income within those two years (for example, it was rented during that time but sold before the two years exemption expiry).

Does a beneficiary have to pay CGT on an inherited property?

Where the property passes to a beneficiary under a valid Will, this type of transfer is not considered a CGT event and CGT will not be payable by the estate upon transferring the property.

However, a CGT event may occur when the property is next sold by the beneficiary. For example, if the deceased owner purchased their investment property in 2018 and was used for rental income until their death in 2022, then CGT may be payable for that period once the beneficiary sells the property. The beneficiary may still receive a partial CGT exemption in this circumstance, taking into account the amount of time the beneficiary used the property as their own PPR.

Vacant residential land tax on deceased estates

Briefly, if the property was used as a PPR immediately before the deceased owner's death, then the property is exempt form the Vacant Residential Land Tax (VRLT). However, if the property was used as an investment property prior to their death then the VRLT will continue to apply, and the property must remain occupied for at least six (6) months of the calendar year.

How Sharrock Pitman Legal can help?

Sharrock Pitman Legal has been assisting property and investors with property transactions for over 50 years. As Accredited Specialists in Property Law and Wills & Estates Law, our lawyers advise businesses and individuals with strategies to manage property portfolios, as well as assisting with purchase, transfer and divestment of real estate.

Please do not hesitate to contact us on 1300 205 506 or email property@sharrockpitman.com.au.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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