Inheriting a Property From Your Parents
Inheriting a property from your parents is an emotional and complex experience. It comes during a time of grief, and involves making a significant financial decision. If you have inherited your parent’s family home or an investment property, understanding the process, your responsibilities, and your options is key to making informed decisions.
In this blog, we’ll walk you through the process of inheriting a property in Australia, outlining the key differences between an inherited home versus an investment property, highlighting potential risks and considerations, and will explain how a financial planner can help guide you through this major life event.
Understanding the Inheritance Process
When a person passes away in Australia, their estate which may include property is managed through their will. The person responsible for executing the will (the executor) manages the distribution of assets in line with the wills instructions.
If you’re the beneficiary of a property the process is:
Probate
Probate is usually required before a property can be transferred to a beneficiary but in some cases, it may not be required. Probate is a court order that validates the will. Probate confirms the executor’s authority to manage the estate and can take a few weeks to a few months, depending on the complexity of the estate.Title Transfer
Once probate is granted, the property title can be transferred to the beneficiary’s name through the relevant state or territory land titles office.Outstanding Debts or Mortgages
If the property has an existing mortgage, this needs to be addressed. Sometimes, the estate will use cash or other assets to repay the mortgage before transferring the property. In other cases, the beneficiary may choose to refinance or take over the mortgage themselves.Capital Gains Tax (CGT) Considerations
While there is no inheritance tax in Australia, CGT may apply if the property is later sold. The implications depend on how the property was used (as a main residence or investment) and whether you keep or dispose of it.
Inheriting a Family Home (Principal Place of Residence)
If you inherit your parent’s home, the decision on what to do next is typically:
Living in the property yourself
Renting it out as an investment
Selling the property
CGT Implications
A property inherited from a deceased person may be exempt from CGT if:
It was their main residence at the time of death and
It is sold within two years of the date of death
However, if the property is held longer than two years or is used to generate income (e.g. rented out), CGT may apply.
Other Considerations
Emotional attachment - It’s not uncommon to feel sentimental about the family home, but it’s important to consider the practicalities of keeping versus selling
Upkeep and costs - Maintaining a home comes with ongoing expenses such as rates, insurance, and ongoing repairs
Insurance - it’s important to check that the property is insured properly during the transition.
Inheriting an Investment Property
If your parents owned an investment property, the financial implications are different:
Rental Income
As the new owner, rental income will be paid to you by the tenants. This would be declared as income in your tax return. This can have financial implications depending on the income generated and the income you generate personally throughout the year.
Depreciation and Deductions
You may be eligible to claim deductions for costs of the property for example depreciation, maintenance, interest on the mortgage and other holding costs.
Capital Gains Tax (CGT)
CGT will likely apply if you sell the property.
Vacant Properties or Holiday Homes
If the investment property is vacant, the two-year CGT exemption may not apply here, so it’s important to understand your tax position before making a decision.
Key Financial Considerations
When inheriting a property, several financial elements need to be considered:
1. Ongoing Costs
These may include:
Council and water rates
Land tax
Property maintenance
Mortgage repayments (if applicable)
Strata fees (if applicable)
2. Ownership Structure
In some cases, the property may be left to multiple beneficiaries (e.g. siblings). Joint ownership may lead to complications, especially if some beneficiaries want to sell while others want to retain the property. Options include:
Agreeing to sell and split proceeds
One party buying out the others
Establishing a formal co-ownership agreement
3. Estate Liabilities
Sometimes, a property may need to be sold to pay off other estate debts or taxes. This is typically managed by the executor, but can impact beneficiaries’ plans.
How a Financial Planner Can Help
Inheriting a property can present both opportunities and challenges. Working with a financial planner during this time can offer valuable clarity and direction. Here's how a planner can help:
1. Understand Your Financial Position
A financial planner can assess how the inherited property fits into your broader financial picture including your income, debts, goals, and long-term plans.
2. Evaluate the Options
Whether to:
Keep the property as an investment
Move in and make it your home
Sell and use the proceeds elsewhere
Each option carries tax, legal, and financial implications. A planner can guide you through pros and cons, tailored to your situation.
3. Budgeting and Cash Flow
If you keep the property, how will it impact your budget? A planner can help forecast the ongoing costs, rental income, and potential tax obligations.
4. Debt Management
If you take on a mortgage as part of the inheritance, a financial planner can help with debt strategies such as offset accounts, or debt repayment strategies.
5. Investment Strategy
Should you sell the property, a planner can help determine the best use of the proceeds in line with your risk profile and long-term goals. For instance, you might pay down existing debts, contribute to super or invest in other asset classes.
6. Navigating Tax Issues
While financial planners don’t provide tax advice, they work closely with accountants and can flag key tax issues such as a CGT liability, rental income tax, and deductions.
Common Mistakes to Avoid
Making Emotional Decisions
Holding onto a property purely out of sentiment can sometimes cause financial strain. It’s important to consider how the asset will fit into your financial situation, goals and objectives.
Ignoring the Tax Implications
Assuming that CGT won’t apply can lead to surprise tax bills. Seek advice early to avoid complications later on.
Delaying Decisions
Waiting too long to act (e.g. not insuring a vacant property or letting rates accrue unpaid) can cause additional stress and costs.
Family Disagreements
If multiple beneficiaries are involved, open communication and legal agreements are important. A financial planner can help facilitate impartial discussions around money and future goals.
Inheriting a property from your parents can be a blessing, but it also comes with responsibility. Whether it’s a sentimental family home or a well-located investment property, it’s important to approach the situation with care, consideration, and a clear plan.
By understanding the process and the financial implications, and by seeking professional guidance where needed, you can make the most of your inheritance while honoring your parent’s legacy.
If you've recently inherited a property or expect to in the future, it can be helpful to speak with a financial planner to explore your options and ensure you're on the right track. At Unified Wealth, we help clients in Australia navigate property inheritances with confidence and clarity.
Feel free to book a no-obligation chat, we’re here to help.
About Us
After working as an advisor for a decade, Joel founded Unified Wealth.
Unified Wealth specialises in helping clients who are facing life’s big decisions.
Whether you’re contemplating your first property, growing your family or starting your investment journey we can help you focus on the simple steps to help you make your goals reality.
Our priority is making sure you have all the right information available to make the best possible decisions for you and those you love.
Our company values are:
Unity - We are most effective when we work together as a team
Trust - We are trustworthy and act in your best interests
Transparency - We are honest and communicate openly
Education - We are committed to lifelong education
At Unified Wealth our team is highly experienced and provides goal-based advice and solutions for a range of advice strategies.
Speak to our team today.