Nick Bruining Q+A: Inherited the family home? Capital gains tax payable on its sale will come down to timing

Question

I recently inherited my mother’s home, which my parents purchased in the 1960s for $11,800.

When we applied for probate a few weeks ago, the property was valued at $1.1 million. It is my intention to sell the property but I am confused about the capital gains tax situation.

How would this be calculated?

Answer

It will depend on when you sell the property. As the home was your mother’s primary dwelling, the capital gains tax exemption will continue to apply if you decide to sell the property within two years of her death.

If you decide to keep the home, other rules apply. Capital gains tax may be payable on the increase in value from the date of her death until the time it is sold.

If that is your intention, you will need to obtain a formal valuation rather than rely on your estimation or a real-estate agent’s appraisal.

The amount of tax payable will depend on your other income in the year the home is sold. In very simple terms, half of the profit will be added to your other income and you will pay the marginal tax rate applicable to your total income for that year.

Depending on your age and other contributions to superannuation, you may be able to reduce the tax liability by making a personal tax-deductible concessional contribution to super.

To do this, you will need to be under the age of 67 and not have used up your contribution cap. If over 67, other rules apply.

Question

After listening to commentators talking about the current values of shares, I am concerned a fall is coming.

As a type of protection, I have heard people talk about investing some of the gains I have made by selling some shares and putting the money into bonds.

I am wondering how I might go about it?

Answer

Bonds are essentially loans taken out by governments and corporations where they borrow money from institutions and the general public.

For example, the Federal Government might want to borrow money to pay for infrastructure projects, and it does so by issuing Australian government bonds. Those bond will have a “face value” reflecting the principal of the loan, an interest rate paid, and a term for the loan.

The underlying risk of the issuer determines what interest rate needs to be offered to entice investors to take up the bonds. Bonds can’t be cashed in ahead of time but can be sold in an open market. That introduces a source of volatility because as interest rates and other variables change over time, the bond’s value needs to be re-priced in order to make it saleable in an open market.

Risk-wise, a good quality bond might be described as sitting midway between a bank’s term deposit and owning shares in that bank.

For these reasons, a bond’s total return over a period of time might include the interest payment received plus or minus the change in capital value.

Bonds are not restricted to Australian issuers only. Other countries and large corporations also issue bonds, but this exposes you to another variable: currency exchange risks. Most capital-stable or conservative superannuation funds will have a very high exposure to bonds which can be as much as 80 per cent of the total investment portfolio.

Unlike the US, the Australian retail bond market is fairly limited, though there are a number of brokers who trade in bonds for retail investors.

Nonetheless, like a well diversified share portfolio, managing risk involves spreading your investment across a range of assets, and the same should apply with bonds.

The easiest way is to use an existing exchange-traded fund which can be purchased through your stock broker or to invest via a conventional unit trust investment.

Most of the managed fund providers have bond funds you can invest in.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association