Griffith University recently authored a report that shows over the next 20 years there will be an estimated $3.5 Trillion in wealth that will transfer through inheritance. For many, that will include a property (or two) and while it’s not front of mind, the first instinct for executors and beneficiaries alike is to sell it.
A house in your inheritance can be an emotional and financial burden, but also a tax burden if not dealt with quickly in some circumstances. For example, Capital Gains Tax (CGT) can influence the decision. CGT may be incurred if the property is not sold within two years of the date of death or is no longer the main residence of the remaining spouse. If the property is retained beyond the two years or was not the person’s main residence, CGT may apply on the growth in value from the date of death. You should seek tax advice as soon as possible when dealing with inherited property as the calculation of CGT is complex.
Other issues can be bills, mortgages, or the house is in a location you rarely visit or find appealing. But if you are an executor, there are other options and selling shouldn’t be considered your only option when someone passes away and leaves property.
Before you rush to sell, you should understand that you have more than one option. You can:
Sell;
Rent out;
Demolish and redevelop; or
Renovate the property.
Understanding the Executor’s Powers
The first thing an executor should know (if the person died with a valid will and it was drafted well) is that a will often contains a clause which gives the executors certain powers when dealing with the assets of the deceased person. These powers include the ability for the executor to take out loans in the name of the estate, as well as to improve and develop property. This opens the options for the executor when considering what to do with the property.
Option 1
Your first option and the most chosen, is to simply sell the property. Depending on the position of the beneficiary or beneficiaries, their connection to the property or financial circumstances, the executor will often sell the property to liquidate for cash. This is a completely valid option, and often some people just want to avoid the CGT implications if the property isn’t sold. You should also note that CGT is always applicable to commercial real estate and the standard two-year time period with residential does not apply to commercial real estate.
Option 2
The second option is to rent the property. This really depends on the location, the home, the potential rent to be collected, and the appetite of any beneficiaries for quick cash. Unless you are the sole beneficiary, you will have to consider them when making these decisions and everyone will need to agree. You should also seek financial advice from an accountant about whether the CGT implications will impact any benefit in renting the property. You also have the right as executor to rent the property during the 2-year period and this can potentially assist with covering any legal and real estate fees while you decide what to do with the property. Be aware though that this could impact the estate when preparing the deceased person’s final tax return.
Option 3
Demolish the property and redevelop. One of the powers executors have in a will is the ability to pull down and re-erect any part of the estate. This includes redevelopment of the property to build something new and potentially increase the value as well as the potential return for beneficiaries. For example, if the property is worth $1.5 million and the property is suitable for redevelopment to build a duplex worth $1.5 million each, this will see a total return of $3 million less the costs to design and build. It is worth noting though that after a loved one has passed, you do not often think about these things, but depending on the situation you or the beneficiaries are in this may be an ideal outcome and give a cash boost to all beneficiaries. You should seek advice from an accountant about any tax implications, as well as seek advice from a building designer or architect. You should also seek advice from a real estate agent familiar with the area to understand local property values.
Option 4
If the redevelopment of the land is not viable and the benefits do not outweigh the cost, your other option is to renovate. This is also a power executors will have in the will and if you have this option, it can help you if the property is dilapidated. Again, often an executor will opt for the quickest option and sell the property as is. If, however, the property is dilapidated or needs a lot of work to make it market-ready, then renovation may be the best option. Even if the property is not in poor condition, this could boost the value of the property. You should ensure you do your research first. In many cases, developers may buy the land, demolish it and put a duplex on it depending on the land size and the age of the property.
When you are deciding what to do with a property as part of a deceased estate, you should always be sensitive to those who will benefit from it. While inheriting a property can be a positive thing, it comes at the tail end of what is often a tough time for those left behind after the deceased person passes. You should also discuss your intentions with any of the beneficiaries and ensure that everyone has agreed to whatever the choice may be. While it might also be in everyone’s best interest to improve the value of the property, it isn’t always the most practical or the easiest thing to do. If it is the family home, it can also be a painful memory to watch be sold or demolished.
Finally, always seek professional advice on these decisions as there are many factors at play. Seek advice from an accountant about any tax implications that might be relevant and speak to a real estate agent about the trends in relation to property in the area.
This article is not intended to be a substitute for detailed legal or financial advice. You should always seek advice from the relevant professional when obtaining legal or financial advice. If you’d like to understand more about your obligations as an executor or need assistance with administering a deceased estate, contact us today to obtain tailored legal advice for your situation.
