Who gets the family home when the owner dies?
Who Gets The Family Home
What to look out for when one of your parents dies? What are the tax implications depending on who gets the family home?
In this episode Amanda Morton of Morton Legal Consulting and Paul Goldin of Vectigal Legal will walk you through common issues that come up when a family home goes into an estate.
Here is what we learned but please listen in as Amanda and Paul explain all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Who Gets The Family Home
The CGT main residence exemption lives in Subdivision 118-B. You have two years from death to sort out who gets the family home, possibly longer if you successfully ask the Commissioner for an extension.
During these two years – or longer if you get an extension – you can rent out the old family home and still get the main residence exemption thanks to Taxation Determination TD 1999/70.
Foreign Resident
The main thing you need to look out for – apart from the two-year deadline – is whether the deceased owner was an excluded foreign resident at the time of their death.
If they were, no main residence exemption, even if they lived in the house most of their life. It all depends on your residency at the time of your death.
However, you might be able to get back in through the life events test. If you had a life event during the past six years, you might still qualify for the main residence exemption.
Foreign Beneficiary or Charity
If the house goes to a foreign person or charity, you trigger CGT through CGT event K3 to tax the capital gains tax up to then. However, the main residence exemption might cover this capital gain.
Farm
Large properties – for example, farms – don’t get the main residence exemption for all land involved. The exemption is usually limited to the two hectares or less the house and garden are on.
However, the rest of the farm might qualify for the 50% CGT discount as well as the small business CGT exemption.
So chances are high that the entire farm is CGT exempt. Just not all through the main residence exemption.
Testamentary Trusts
Testamentary trusts used to be the swiss-army knife for any property you wanted to keep in the family.
But this is worth a rethink. It depends on the situation and the residency of relevant beneficiaries.
Testamentary trusts come with five potential issues you need to look out for.
1 – Foreign trust surcharges
2 – CGT Event K3
3 – Main residence exemption
4 – Distribution to minors
5 – Admin costs
If you can avoid all these, then a testamentary trust can still be a great way to pass property from generation to generation.
1 – Foreign Trust Surcharges
To what extent the testamentary trust attracts foreign trust surcharges for land tax depends on whether the trust qualifies as a foreign trust.
And that depends on a) where the land is located and b) who the relevant beneficiaries are. If any one of the relevant beneficiaries is a foreign person, then you have a foreign trust that attracts additional land tax.
The same applies to stamp duty but the transfer from the deceased to the estate and then to the testamentary trust should not attract stamp duty, unless you shovel things around.
2 – CGT Event K3
CGT event K3 is not just an issue for property passing from the estate to individual names, but also for property passing to a testamentary trust.
If the testamentary trust is a foreign trust, then the property potentially leaves the Australian CGT regime and hence CGT event K3 triggers CGT at that stage.
3 – Main Residence Exemption
A family home owned by a testamentary trust doesn’t qualify for the main residence exemption past the two year period.
So if your family home is to remain or become the family home of one of your children or grandchildren, don’t put it into a testamentary trust but move it into their individual names.
4 – Distribution to Minors
Children under 18 usually pay much higher tax rates than adults to prevent you from moving assets into your children’s names to save tax.
However, distributions from testamentary trusts to minors are taxed at adult rates. So that is a good thing.
But only income from assets moved into the trust by will now qualify as so-called excepted income. So you can no longer move assets into the trust at a later stage and still treat them as excepted income.
The income from those later assets will be taxed at the rates for minors in Div 6AA ITRAA36.
5 – Administration Costs
Testamentary trusts are not cheap. You need a lawyer to properly set one up. And then you need an accountant and tax agent to do the books and tax returns each year.
That all costs money that maybe might be better spent otherwise. Maybe. It all depends on the size of your assets and the residency of your beneficiaries.
CentreLink
If and when your parents move into an Aged Care facility, for the first two years Centrelink won’t include their family home in their asset test.
But after that they do. And that might mean that your parents might no longer qualify for the CentreLink Age Pension or Aged Care subsidies, making it harder to retain the home for future beneficiaries.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.