An Australian resident inherited a property from their deceased parent in 2020 valued at $400,000 and sells it in 2024 for $520,000. The property was the parent's principal place of residence. What is the cost base for CGT purposes?

Q: What is the correct answer to: An Australian resident inherited a property from their deceased parent in 2020 valued at $400,000 and sells it in 2024 for $520,000. The property was the parent's principal place of residence. What is the cost base for CGT purposes?

The correct answer is $400,000 - the market value at date of death. Option B is correct because under Division 128 of the Income Tax Assessment Act 1997, inherited assets receive a 'stepped-up cost base' equal to the market value at the date of death. This means the beneficiary's cost base is reset to $400,000 (the property's value when inherited), not the original purchase price paid by the deceased parent. The CGT liability is calculated only on gains above this stepped-up cost base, so the taxable gain would be $120,000 ($520,000 - $400,000).

Q: What background knowledge is needed for this Finance Taxation question?

Capital Gains Tax (CGT) applies to assets acquired after 20 September 1985. When someone inherits property, Division 128 of the Income Tax Assessment Act 1997 provides that the beneficiary receives a 'stepped-up cost base' equal to the market value at the date of death. This rule ensures beneficiaries only pay CGT on gains that occur after inheritance, not on appreciation during the deceased's ownership. The market value must be determined by a qualified valuer. CGT events A1 (disposal of CGT asset) and K3 (asset passing to beneficiary) are relevant. The main residence exemption may also apply if specific conditions are met.

Q: What is a good way to remember the answer to this Finance Taxation question?

Remember 'STEP-UP' for inherited properties: 'Stepped-up cost base Takes Effect at Property's Underlying Price' at death. Think of it like stepping up to a new starting point - you don't carry the deceased person's 'baggage' (their original cost), you start fresh at the current market value when you inherit. When you see inheritance questions, immediately think 'STEP-UP' and look for the market value at death as the cost base option. Eliminate any answers referring to original purchase prices or zero cost base.

Q: What exam tip applies to this Finance Taxation question?

For inheritance CGT questions, always look for the market value at date of death as the cost base. Ignore the deceased's original purchase price and remember that inherited properties do have a cost base - it's just 'stepped-up' to current market value.

Q: How does this Finance Taxation concept apply in Australian real estate practice?

Sarah inherits her grandmother's investment property valued at $600,000 at death in 2023. Her grandmother originally bought it for $200,000 in 1995. When Sarah sells the property in 2024 for $650,000, she only pays CGT on the $50,000 gain ($650,000 - $600,000), not on the full $450,000 appreciation since 1995. This stepped-up cost base rule protects Sarah from being taxed on gains that occurred before she owned the property, making inheritance more tax-efficient than inter-generational gifts during lifetime.

Question

Finance TaxationCGTHARD

An Australian resident inherited a property from their deceased parent in 2020 valued at $400,000 and sells it in 2024 for $520,000. The property was the parent's principal place of residence. What is the cost base for CGT purposes?

Answer Options

A

$0 - inherited properties have no cost base

B

$400,000 - the market value at date of death

C

$520,000 - the sale price

D

The original purchase price paid by the parent