Inheriting Mum’s or Dad’s house

For some people, inheriting property of any kind is just a matter of acquiring bricks and mortar. For others, they inherit memories, roots and a piece of family history. No matter which describes you best, you probably have a lot of financial questions about inheriting Mum’s or Dad’s house.

At First Financial, we help clients make informed financial decisions that bring them closer to their dreams. Understanding the implications of inheriting Mum’s or Dad’s house is a crucial step in this journey.

So, if you’re wondering about the capital gains tax (CGT) when you decide to sell, keep reading.

When inheriting someone’s primary residence, whether it belonged to your parents or anyone else, you receive it with a value determined at the time of the original owner’s passing. If the property was the deceased person’s primary residence, a special two-year rule applies.

This rule allows you the freedom to make various decisions regarding the property, such as leaving it vacant or renting it out. Whatever you choose, if you decide to sell the property and complete the sale within two years of the person’s death, you can avoid paying CGT on the sale.

Once the two-year period elapses, CGT becomes applicable, calculated based on the value of the property at the date the owner died. To extend this two-year period and maintain CGT-free status, you can make the property your primary residence. This will ensure you qualify for the primary residence exemption, removing CGT liabilities.

When it comes to inheriting properties of a different nature, such as vacation homes, investment properties or commercial real estate, it’s important to note that the CGT rules for these property types are significantly different from those of a primary residence.

If you inherit a property purchased before September 1985, you receive it with a value determined at the time of the owner’s passing. Subsequently, you will incur CGT (if you sell) on any future appreciation in the value of the property.

For properties acquired after September 1985, the rules are different again.

In this scenario, you inherit the property with a value equal to the original purchase price paid by the deceased, which includes any unrealised capital gains from the time of purchase to the present, even if the property’s purchase took place in the 1990s for a minimal cost.

Inheritance often entails both financial and emotional considerations. If you’ve recently inherited a home from a parent, you’re likely feeling a profound sense of grief. Balancing this pain with sentimental attachments to the property while adapting to your new responsibilities can be overwhelming. Don’t hesitate to reach out to the appropriate professionals for help if you need it, as emotional well-being is essential for making sound financial decisions.

In Australia, there are no inheritance or estate taxes. However, as the beneficiary, you may have tax responsibilities for the inherited assets. As mentioned earlier, CGT could apply when you dispose of the property, and standard income tax is applicable to any dividends or rental income from the shares or property you’ve inherited.

If you receive Centrelink benefits, including the age pension, you may also wonder how property inheritance impacts your payments. Centrelink applies the means test to the age pension and other benefits, and exceeding the asset threshold can lead to a complete pension cutoff. Moving into the inherited property as your primary residence is often the only way to avoid this outcome, assuming you don’t already own another home. If the will designates you as the beneficiary, there’s very little you can do to prevent Centrelink from considering the property as your asset. Even if you later gift it to someone else, it remains counted as your asset for five years under gifting rules.

“The only solution is to ask the will maker, while they’re still alive and capable, to skip a generation and leave the property to your kids or grandkids, bypassing you as the beneficiary. This way, Centrelink benefits won’t be affected,” says James Wrigley, one of our Principals at First Financial.

Considering the big financial picture is essential during the will-writing process. It enables you to make informed decisions, ensuring you preserve your legacy and adequately prepare your beneficiaries for any future financial implications.

Maintaining open and honest communication with your heirs is imperative. Encourage discussions not only about your wishes but also about what works best financially for them. Sharing the reasons behind your choices can prevent future family conflicts and misunderstandings after your passing.

At First Financial, we specialise in retirement planning, wealth building and generational wealth strategies.

From trusts to investment management, we offer a range of solutions to help you achieve your personal financial goals. If you’re currently engaged in estate planning, our experienced advisers are here to assist you.

It’s never too late to take that first step on the pathway to wealth.

Whether you’re planning your own legacy or you’ve inherited an asset you’re unsure how to manage, we can help. Depending on your personal situation, it may be better to sell, rent or retain the property as your primary residence.

For professional financial advice, contact a member of our friendly team today.

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