Inheriting A Property

Inheriting a property, whether from parents, siblings, or other relatives, can offer financial opportunities but also comes with important considerations. Capital Gains Tax (CGT) is one such factor. The property’s past use and the future plans for it – such as selling it, living in it, or renting it out – play a crucial role in determining CGT implications. Understanding these factors is essential to avoid unexpected tax obligations and make informed choices.

Beyond taxes, the financial situation of the inherited property can influence your next steps. Your responsibilities will differ, depending on whether the property is fully paid off, has an existing mortgage, or is co-owned with beneficiaries. For example, managing a mortgaged property may involve ongoing repayments, while co-ownership could require collaboration with other beneficiaries on decisions like maintenance or selling. Careful consideration helps turn the inheritance into a manageable and rewarding financial asset.

Inheriting a property after 1985

Let’s consider a residential property owned by your grandmother who has now passed away. The executor of her estate will transfer this property to you as per the will. What happens next?

If your grandmother used the property as her principal place of residence and she purchased it after 19 September 1985, then there are no tax consequences. You simply inherit the property, and for tax purposes you also inherit her cost base for it at the price she first purchased it for.

When you eventually sell it you need to figure out if how much of the gain is free from CGT, which is dependent on how long you used it as your home.

What about properties purchased before 1985?

If the property was used by her as her principal place of residence and bought before 19 September 1985, then the impact similar. You get given a cost base equal to the market value of the property at the date of death.

When you eventually sell it you need to figure out if how much of the gain is free from CGT which is dependent on how long you used it as your home.

If the property was used by her as her principal place of residence and you don’t want to live in it you have two years from the date of death to sell it and not worry about Capital Gains Tax.

Inheriting an investment property

Consider an investment property (commercial/residential/industrial) owned by your late grandmother. The executor of her estate will transfer this property to you as per the will.

What happens next?

If the property was an investment property and bought after 19 September 1985, then there are no tax consequences. You simply inherit her cost base for it. When you eventually sell it you need to pay CGT.

If the property was an investment property and bought before 19 September 1985, then there are no tax consequences. You simply get given a cost base equal to the market value of the property at the date of death. When you eventually sell it you need to pay Capital Gains Tax.

Borrowing to complete an inheritance

What happens if you inherit a one third share of a property? The other beneficiaries may decide they want to sell, whereas you may decide that you would like to keep the property.

You can apply for a mortgage to buy out the other beneficiaries / owners however if you don’t have a 5% deposit in genuine savings then most of the banks will decline your loan even though you have a significant amount of equity in the property.

The reality is that when an inherited property is received, you may not be ready to take on a new home loan so you may find yourself unable to qualify for a mortgage. Thankfully there are specialist lenders that can accept an application from you even if you have no genuine savings, problems with your employment, no income evidence or even a bad credit history.

Our mortgage brokers are experts in helping people to finance a property that they have inherited. Please call us on 1300 889 743 or enquire online.

What to Consider When Buying Beneficiaries Out of an Inherited House

Sometimes beneficiaries that inherit property together cannot come to an agreement on whether to enter into joint ownership or to sell.

If one of you wants to sell and the other doesn’t, there are some options available:

• Buy out your beneficiaries’ share of the inherited property: You can apply for a mortgage to buy out your sibling’s share of the inherited house. The property is typically split 50:50 between you and your brother or sister unless explicitly stated otherwise in the will. This works best if one beneficiary wants to sell and the other wants to keep the property.
• Turn the house into an investment property: If both or all beneficiaries are okay with being co-owners, you can turn the house into an investment property and rent it out. The rental income can then be divided accordingly.
• Private arrangement: If you alone cannot afford the mortgage to pay out your beneficiaries’ share, you can draft a promissory note to your beneficiary’s for their share. You can then pay them monthly instalments plus interest to buy out their share over time. You need to consult a solicitor to go over the private arrangement.
• Sell the house: If all the beneficiaries cannot come to an agreement, there may not be a suitable solution other than to simply sell the house and pay out each beneficiary’s share.
• Take it to court: If all the beneficiaries are in dispute and an agreement cannot be reached, then there’s no option but to involve the court which typically results in a forced sale of the property. The court procedure can be complicated and costly so, its best to avoid it.

How to buy out your beneficiary's share

The process is fairly straightforward once you’ve come to a mutual agreement to buy out their share of the inherited house:

• Order a valuation/appraisal of the property for the fair market value of the house.
• Determine the other beneficiary’s share of the house based on the last will and testament.
• Apply for a mortgage or refinance your mortgage to pay out your beneficiary’s share.
• Make an offer.
• Consult a solicitor and make it legally binding.

Speak to an accountant

This information is general and has been provided by Lucentor Pty Ltd who are accountants that specialise in tax for property investors. We recommend investors obtain financial advice specific to their situation before making any investment or decision regarding their finances.