Private ruling: Deceased estates – inheriting a dwelling – cost base
Date of advice: 10 March 2017
Published: March 2018
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to the two year exemption from capital gains tax under section 118-195 of the Income Tax Assessment Act 1997 ( ITAA 1997) if you sell the inherited dwelling within two years of the deceased’s date of death? | A1: Yes | Q2: Is the first element of your cost base the market value of the dwelling as at the deceased’s date of death? | A2: Yes

Relevant facts and circumstances: The deceased passed away in 2015. In 1984 you and the deceased each purchased 50% of a property (the dwelling). The deceased continued to reside in the dwelling until mid-2000, when they moved out of the dwelling due to health reasons. The deceased purchased your 50% share of the dwelling in 2003. The dwelling was left vacant after the deceased moved out to be cared for by family, and has not been used to earn assessable income during the deceased’s ownership period, or after their death. The deceased elected to use the absence choice to maintain the dwelling as their main residence. You and your brother each inherited a 50% share of the dwelling.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-05 | Income Tax Assessment Act 1997 section 118-195

Reasons for decision: Summary: You are entitled to the two year exemption from capital gains tax, as long as you sell the inherited dwelling within two years of the deceased date of death. | Detailed Reasoning - Detailed reasoning: Generally, a dwelling is no longer your main residence once you stop living in it. However, in some cases you can choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it. This is known as an absence choice. You may make an absence choice as long as you do not live in another property that you own. That is, you can only claim one main residence exemption at a time. If you use the property to earn assessable income, you can treat the dwelling as your main residence for up to six years. If the dwelling is not used to earn assessable income, you can choose to treat the property as your main residence indefinitely. In your case, the deceased did not own another property that was also their main residence after they moved out of the dwelling in mid-2000. The dwelling was not used to produce assessable income during this period. In these circumstances, the deceased may continue to treat the dwelling as their main residence indefinitely. Therefore, the dwelling is considered to be the deceased’s main residence at the time of their death. If you inherit a dwelling that was a deceased person’s main residence at the time of their death, and you dispose of your ownership interest within two years of the person’s death you are able to disregard any capital gain or loss made from the CGT event. In your case, the dwelling was the deceased’s main residence at the time of their death. As long as you dispose of your ownership interest within two years of the deceased’s date of death you are entitled to the two year exemption from CGT. | Summary: The first element of your cost base and reduced cost base of the dwelling is taken to be its market value on the day the person died. | Detailed Reasoning - Detailed reasoning: If you acquire a dwelling that a deceased person owned, there are special rules for calculating cost base when working out your capital gain. The first element of the cost base or reduced cost base of the dwelling is its market value at date of death if the dwelling passes to you after 20 August 1996 (but not as a joint tenant) and it was the main residence of the deceased immediately before their death and was not being used to produce assessable income at that date. In your case, the dwelling was the deceased’s main residence and was not being used to produce assessable income at the time that they died. This means that the first element of your cost base will be the market value of the dwelling as at the deceased’s date of death. | Detailed Reasoning - Further information: If the property is not disposed of within the two year period, you can request the Commissioner to grant an extension of time. Generally, the Commissioner would exercise the discretion in situations where the delay is due to legal or physical circumstances which are outside of the control of the beneficiary or trustee, for example the emergency repairs you identified as being required before the dwelling is fit for sale. In exercising the discretion, the Commissioner will also take into account how long the trustee or beneficiary held the ownership interest in the dwelling and to what extent they have used it for other purposes. For example: ● Using the dwelling to produce assessable income ● Making the dwelling available to family members ● Delaying disposal of the dwelling awaiting a higher sale price ● Renovating the dwelling to enhance the sale price ● Choosing to give priority to other aspects of the estate