When faced with the loss of a loved one, the last thing on your mind is property tax and government legislation. A time for grieving can turn into a messy situation when property inheritance is involved. Nevertheless, having an understanding of estate and inheritance law can help make a potentially messy situation a bit easier to get through.
If you’re inheriting property in Australia and are at a loss for what to do next, this blog is for you. In this guide, we explain what property inheritance is and how it works in Australia as well as what to expect in terms of tax. If you’re confused about whether to keep or sell this property, we also go over the benefits and challenges involved in inheriting a property.
What is property inheritance and property inheritance law in Australia?
Property inheritance, also referred to as succession, is the transfer of property to an heir or beneficiary upon the passing of the owner. In Australia, each state enacts the property inheritance law legislated for it.
And while the laws governing inheriting property in Australia differ from state to state, there are a lot of commonalities as well. The following legal term definitions will apply throughout property inheritance law in Australia:
- Estate: an individual's assets. This includes, properties, possessions, and monies, as well as debts and financial liabilities.
- Testator/testatrix: an individual who makes and leaves a will.
- Beneficiary: someone named in a will to receive something from it.
- Will: a will is a legal document detailing an individual's wishes when they pass. away. It usually outlines who should receive the individual's assets, heirlooms, and personal items.
- Executor: the person or organisation appointed in the will to manage a deceased individual’s estate.
- Intestate: An individual’s estate if they did not leave a will behind.
- Partially intestate: An estate where some of the assets are unaccounted for in the individual’s will is referred to as partially intestate.
The terms outlined above are a reasonable starting point to understand if you are a beneficiary in a will and what exactly is being gifted to you.
How does inheriting property work in Australia?
To further illustrate the ins and outs of inheriting property from parents in Australia, we’ve answered a set of commonly asked questions:
Do I pay stamp duty on inherited property?
If you’re inheriting property from anyone, you won’t need to pay stamp duty. Instead, you will need to pay ‘transfer duty at a concessional $50’.
What happens when there is no will?
If a deceased has not left a will behind, then the rules of intestacy apply. Generally, intestacy entitlements stipulate that the spouse inherits the entire estate.
In the absence of a spouse, the children are entitled to equal parts of the estate. In the absence of relatives, the government takes the estate. To learn more, refer to intestacy rules here.
Is my inheritance marital property?
It depends. If you received an inheritance before or during a property settlement with an ex partner, odds are it will be added to the marital assets pool.
Family courts will look at how long you were together, how the inheritance benefited you as a couple, and the contributions of each person to the partnership.
How do I contest a will?
If you feel you’ve been unfairly left out, the first step of contesting a will is to obtain a copy and study it. You’ll need to get a good lawyer to support you.
Your best chance of ensuring a portion of the estate is to prove that the will itself is illegal - which means that the testator was under duress when they signed it or they had diminished mental ability.
Can I buy out my siblings or other partial estate owners?
If you’re inheriting property from parents with your siblings, you can buy them out of their share in agreement with them. In this case however, you will have to pay stamp duty and will generally have to evaluate the property rather than pay them out at the cost base.
Tax implications on property inheritance in Australia
A lot of people think that they’ll be exempt from tax on inherited property in Australia. And while there are certainly some residence exemptions to be had, it’s not that simple.
In order to work out if you’re exempt from capital gains tax on inherited property, you need to consider:
- that capital gains tax on property was introduced on September 20, 1985
- selling the property within 2 years of inheriting it
We’ve highlighted a few scenarios in the following table to help you figure out whether you’re exempt from the tax on the property you inherited in Australia:
Tax exemptions on property inheritance
The deceased died before September 20, 1985 you inherited the property
The deceased died after September 20, 1985 but acquired the property before, and you sell the property within 2 years of inheriting it
The deceased died after September 20, 1985 but acquired the property before, the property was inhabited by someone not named in the will after the deceased passed away and you sell the property after 2 years since inheriting the property
The deceased acquired the property after September 20, 1985, you inherited it before 20 August, 1996 and the deceased used the property to generate income before they passed away
In cases where you’re not fully exempt, you may be partially exempt from capital gains tax on inherited property. Follow the questionnaire prompts here to find out.
Pitfalls of inheriting property in Australia
Inheriting property in Australia has a lot of benefits, but it also comes with responsibility and financial liability.
If you’re considering keeping your property beyond the 2 year mark or turning it into an investment property, keep in mind some of the following potential pitfalls:
- Property management - managing an investment property needs work and funds. The first steps will be fixing any property damage, sorting out property insurance and making a target market determination. Have a look at our property management guide to learn what it’s all about
- Loss of pension benefits - depending on the value of the inherited asset and when you receive it, you could lose your pension benefits. You should let Centrelink know about any changes to your circumstances within 14 days of the change
- Properties with debt - if you’re inheriting a property in Australia that hasn’t been refinanced yet and you can’t pay off the mortgage, the bank may not release the property. A testator can get around this by nominating the executor to pay off all debts before the execution of the will
Benefits of inheriting a property
We’ve talked about the challenges of inheriting a property in Australia and now it’s time for the benefits:
- Owning a property - with the prices of homes on the increase all over Australia, it is not easy to get into the property market
- A start in property investment portfolio - if you plan to use the inherited property as an investment that means you’ve got a head start in your property investment portfolio. If you plan on growing it, have a read through our ultimate Australian property guide 2022 for a complete breakdown.
- New income stream - if you’ve inherited a property that’s been paid off and turn it into an investment, you’re looking at a fresh income stream. Learn more about it from our new owner guide
- Exemptions from CGT - if you sell an inherited property within 2 years of inheriting, you’re looking at a decent payout with CGT
- Capital gains - if you hold onto an inherited property and sell later, you’ll no longer be exempt from CGT. However, the value of the property will likely increase so you’ll be looking at larger capital gains
While inheriting property in Australia or elsewhere usually comes as part of a sombre event, it’s important that you know the benefits and liabilities of it. This guide and the resources we’ve provided are a good starting point. If you're thinking of using your newly inherited property as an investment home then we recommend you contact one of our experts or consult with your family lawyer.
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