Andrew Garrett is an investment specialist with Perpetual Private. He notes solid listing numbers and recent auction clearance rates of between 70 per cent and 80 per cent indicate a healthy, functioning market.
“Melbourne property prices are just below their peak and the Sydney market is closing in on its peak. Four other major cities are already at peak valuations. So, the property market’s in pretty good health,” says.
Record low interest rates are behind the return of strong market conditions in the two major capital cities, says Garrett. “Banks are also more willing to and taking a more pragmatic approach to lending.”
Nevertheless, Garrett says different dynamics are at play across different state markets. For instance, the Perth market has never fully recovered from the value collapse following the mining boom.
“Perth is still 20 per cent below its peak. Darwin is also suffering. When these cities are hot, they are really hot. Now they’ve cooled down, it’s hard to see prices returning any time soon.”
This is an important backdrop to understand for anyone who has inherited or is expecting to inherit property. In fact, there are many different things to consider when it comes to inheriting property, such as the type of property, when it was acquired and whether the beneficiaries and deceased are residents for tax purposes.
Here, we explore some of the dynamics when it comes to property as part of an estate.
Myth # 1 I don’t need to pay tax if I inherit a property
Many people assume tax is not payable on a property that was a primary place of residence that is inherited – this is known as the main residence exemption. But there are complexities around this, explains Catherine Chivers, senior manager, Perpetual Private.
“The tax stream depends on whether the deceased acquired the property before or after capital gains tax was introduced on 19 of September 1985. The jurisdiction of the deceased and the beneficiaries and where the property is also matters. How the property was used in the deceased’s lifetime and the timing of the sale of the asset after death, as well as new rules which come in on 1 July this year, also complicate things,” says Chivers.
“The main residence exemption legislation is amongst the most complicated in tax law. These new rules deny non-tax residents of Australia the ability to claim the main residence exemption other than in very limited circumstances. So from 1 July this year, non-residents will find if they inherit a property that’s seen as the main residence, it’s no longer necessarily tax free, although there may be a partial exemption,” she explains.
There may also be tax consequences if the property was owned by a testamentary trust, explains Stuart Le Cornu, who is a partner with advisory business Fordham Group, which is part of Perpetual.
“There’ll be a tax impact at the time of the inheritance when you inherit the asset from a testamentary trust and the asset was acquired by the trust after the deceased’s date of death,” he says.
Myth # 2 There will only be tax consequences in Australia after inheriting a property
When people inherit assets they often assume they will only face tax consequences in Australia, says Chivers. But this is not always the case.
“Sometimes people may inherit property here and in a number of overseas markets. This is relevant for estate planning and tax purposes and we have clients in that position. In a very general sense, where the property is located is where the estate planning consequences occur.”
Myth # 3 It doesn’t matter when you sell a property
Often people assume there’s a two-year period after someone’s death during which if you sell a property there’s no capital gains tax. But this is not always the case, says Le Cornu.
“In the case of the family home, there’s no tax if you sell the property within two years and it was the main residence right up until the date of death. But if the property is used to generate rental income for a period or if you sell outside of that two year window, then the inheritance will be subject to tax at the time you sell,” he adds.
As this shows, the tax consequences of inheriting property are complex. So it pays to seek advice as early as possible.
Once you understand the tax consequences, you can make more informed decisions about the right course of action to take. This helps ensure you end up in the best possible financial position after inheriting an asset.