Estate Planning for Rental Property Investors

Good tax planning should involve the inclusion of a testamentary trust as part of the estate plan. There are some little known tax concessions which executors should be aware of when it comes to these trusts and your principle place of residence which I have explained below.

The law allows people to potentially move out of their home for up to six years and not pay capital gains tax upon sale, as long as they don’t have a second home at the time. This is a great concession, but what happens if you purchased your principle place of residence (PPOR) after Sept 1985 (the start of capital gains tax) and are treating this six year rule as your PPOR despite renting it out as you live interstate or overseas for a while… and during this period you pass away?

As this capital gains tax exemption on homes requires that the house isn’t being used to produce assessable income at the date of death, what happens if you die while the house is generating rental income? The question becomes: ‘Is the PPOR exemption still available or does the fact that the property is earning income, remove the CGT exemption?’

Where the dwelling is rented for less than six years before the date of death, then this six year absence rule could apply to the dwelling. Then it could still be treated as the deceased’s main residence at that time and any use to derive rental income can be ignored for the purpose of these rules as long as your legal personal representative (i.e. the executor) made the choice on your behalf.

In this case, a full CGT exemption can apply if that dwelling is sold within two years of the date of death.

In this scenario, it would be prudent for the legal personal representative to retain evidence of making the choice on behalf of the deceased and evidence that the former main residence was sold within two years of his death.

For more information, please contact Paris Financial on 03 8393 1000.

Steve Wildes, Partner, Paris Financial