When a property is inherited, the recipient is considered to have acquired the property at market value at the time of the inheritance. If the recipient decides to sell the property in the future, they may be subject to capital gains tax.

Capital gains tax is calculated by subtracting the cost base of the inherited property from the sale price. The cost base includes the market value of the property at the time of inheritance, as well as any additional costs such as renovations, repairs, or improvements.

If the inherited property was rented out, there are additional factors to consider. If the property was generating rental income, the recipient may be subject to income tax on that rental income. Additionally, the rental income may affect the cost base of the property, as any expenses related to the rental property can be used to offset capital gains tax.

For example, let’s say John inherited a rental property from his father in 2010. At the time of inheritance, the property was valued at $500,000. John decided to rent out the property and has been receiving rental income of $20,000 per year.

In 2021, John decides to sell the property for $800,000. His cost base includes the market value of the property at the time of inheritance ($500,000), as well as any additional costs such as renovations ($50,000). His total cost base is $550,000.

The capital gain on the property is therefore $250,000 ($800,000 – $550,000). John will be subject to capital gains tax on this amount. He may also be subject to income tax on the rental income he received over the years.

It’s important to keep thorough records of any expenses related to the inherited property, as these can be used to offset capital gains tax. If you inherited a property and would like more assistance on this matter, please contact our office at 03 9973 5905.