Capital Gains Tax on Inherited Property

Inheriting a property can provide valuable financial security, but it can also raise important tax and financial decisions. Whether you sell the property, keep it as an investment, move into it or hold onto it for several years, your choices may affect the amount of capital gains tax (CGT) you eventually pay.

The CGT treatment of inherited property is not determined by the inheritance alone. It can depend on when the deceased acquired the property, whether it was their main residence or an investment, how the property was used after their death, how it passed to you and when you eventually dispose of it.

The cost-base rules are particularly important. In some circumstances, the beneficiary’s cost base is the property’s market value at the date of death. In most cases, the beneficiary generally inherits the deceased’s existing cost base, meaning the deceased’s historical capital growth may still be relevant when the property is later sold.

This guide explains how CGT can apply to inherited property, when the main-residence exemption may be available, how the two-year rule works and what to consider before selling, renting out or moving into an inherited home. It is intended as general information only, because the correct outcome depends on the specific facts of the estate and the beneficiary’s circumstances.

 

Do You Pay Capital Gains Tax on an Inherited Property?

The short answer is: it depends. Australia’s tax rules provide a number of exemptions for inherited property, but whether those exemptions apply to you depends on several key factors.

Simply inheriting property does not generally trigger CGT for the beneficiary. CGT commonly becomes relevant when the property is later sold or otherwise disposed of. Renting or otherwise using the property to produce income may affect the exemptions and calculations that apply when it is eventually disposed of.

Your CGT position may depend on:

• • when the deceased acquired the property;
  • whether it was the deceased’s main residence or an investment property;
  • how the property was used immediately before and after death;
  • whether the property passed directly to you or through another structure;
  • whether you sell, rent out or move into the property;
  • when you eventually sell; and
  • whether you or the deceased had foreign-residency connections.

Understanding these factors is the first step toward knowing whether, and how much, CGT might apply to you.

At Precision Wealth Management, our advisers work with clients across a range of tax and investment scenarios to help them make informed decisions at every stage.

How the Cost Base Is Determined

The cost base of an inherited property depends primarily on when the deceased acquired it and how the inherited-asset rules apply.

If the deceased acquired the property before 20 September 1985, the beneficiary’s first cost-base element is generally the property’s market value on the date of death.

If the deceased acquired the property on or after 20 September 1985, the beneficiary generally inherits the deceased’s cost base and reduced cost base at the date of death. This may reflect the deceased’s original acquisition cost, eligible acquisition and disposal costs, capital improvements and other allowable cost-base components.

A market-value cost base can also apply to certain post-CGT dwellings. This includes circumstances where the property passed to the beneficiary after 20 August 1996, other than as a joint tenant, was the deceased’s main residence immediately before death and was not being used to produce assessable income at that time.

This distinction is particularly important for inherited investment properties. If the deceased acquired the property on or after 20 September 1985, you generally cannot assume that the deceased’s historical capital growth disappears for CGT purposes when the property passes to you.

 

What You Need to Know About Pre-CGT Assets

If the deceased acquired the property before 20 September 1985, it was generally a pre-CGT asset while they owned it.

When the property passes to a beneficiary, the first element of the beneficiary’s cost base is generally the property’s market value at the date of death. This generally prevents the deceased’s pre-CGT growth from being transferred as a taxable gain to the beneficiary.

However, the property is not necessarily permanently CGT-free in every future circumstance. CGT may still need to be considered if the property increases in value after death, if major improvements or additions are made, if the land is subdivided or developed, or if part of the property is later used to produce income.

The two-year inherited-dwelling rule and the main-residence exemption may also be relevant, depending on the property’s use and the way it is later disposed of. The treatment of major improvements to pre-CGT property can be particularly complex, so obtain advice before carrying out substantial building, subdivision or development work.

 

Post-CGT Assets and Inherited Cost Bases

For property acquired by the deceased on or after 20 September 1985, the beneficiary generally inherits the deceased’s existing cost base rather than receiving an automatic market-value reset.

For example, if a parent acquired an investment property in 1995 and it was worth substantially more when they died, the beneficiary’s cost base will generally be based on the parent’s cost base at the date of death, adjusted for eligible costs and improvements. It will not automatically become the property’s market value at death.

A market-value cost base may apply in specific circumstances, including certain inherited dwellings that were the deceased’s main residence immediately before death and were not being used to produce income.

The deceased’s historical capital growth may therefore remain relevant when the beneficiary later sells the property. The CGT calculation may include the inherited cost base, capital improvements, selling costs, any available exemption and the beneficiary’s own capital losses. For sales on or after 1 July 2027, the 50% CGT discount will generally only apply to the portion of the gain that accrued before that date. Gains accruing from 1 July 2027 will instead use cost base indexation, subject to a 30% minimum tax. Because the beneficiary inherits the deceased’s acquisition date, many inherited properties will be taxed under both sets of rules.

Some transitional detail is still being settled through ATO guidance and a second tranche of legislation. For a broader look at how tax considerations intersect with property decisions, our post on selling investment property tax advice covers a number of related principles.

 

The Main Residence Exemption for Inherited Property

The main residence exemption may allow some or all of a capital gain on an inherited property to be disregarded. However, the exemption is not automatic.

The outcome can depend on:

• • whether the property was the deceased’s main residence immediately before death;
  • whether it was being used to produce assessable income;
  • when the deceased acquired it;
  • when and how it passed to the beneficiary;
  • whether it was occupied, vacant or rented after death;
  • whether an eligible person had a right to occupy it under the will;
  • whether the beneficiary was an Australian tax resident; and
  • when and how the property was eventually disposed of.

For certain inherited dwellings, a full exemption may be available if the property is disposed of within the applicable two-year period and the relevant conditions are satisfied. Selling after two years does not automatically mean that the entire gain is taxable, but the outcome may depend on whether the property continued to qualify as a main residence and whether it was used to produce income.

If the property is rented, occupied by a beneficiary or held for a longer period, the main-residence calculation can become more complex. A partial exemption may apply instead of a full exemption.

Special rules may also apply where the property passes to multiple beneficiaries, a person occupies it under rights created by the will, or the deceased or beneficiary is a foreign resident. These circumstances can materially affect the outcome and should be reviewed with a registered tax agent.

Selling Within the Two-Year Window for Full CGT Exemption

For certain inherited dwellings, a full main-residence exemption may apply if the property is disposed of under a contract that settles within two years of the deceased’s death.

The two-year rule is not a blanket exemption for every inherited property. It generally applies where the statutory conditions are satisfied, including the relevant conditions concerning the deceased’s ownership, main-residence status and the property’s use before death.

Rental or income-producing use after the deceased’s death does not necessarily prevent a full exemption where the property is disposed of within the applicable two-year period. However, all other conditions must still be satisfied.

An extension beyond two years may be available in limited circumstances, including where exceptional factors outside the beneficiary’s control caused the delay. An extension is not automatic, so the circumstances should be reviewed with a registered tax agent before relying on it.

If the Property is Sold After Two Years

Selling the property after two years does not automatically mean that the entire capital gain is taxable. A full exemption may still be available in specific circumstances.

Generally, where the property is not disposed of within the two-year period, the property must not have been used to produce assessable income from the deceased’s death until disposal and must have been the main residence of an eligible person.

An eligible person may include:

• the deceased’s spouse, other than a spouse who was permanently living separately and apart;
• an individual who had a right to occupy the property under the deceased’s will; or
• the beneficiary, where the relevant inherited-property conditions are satisfied.

If these conditions are not satisfied, the full exemption may be unavailable. A partial exemption may still apply, depending on the property’s ownership history, use and the applicable inherited-property rules.

Renting the Property

Renting the property after inheritance can affect the main-residence exemption, but it does not automatically make the entire capital gain taxable.

If the property is disposed of within the applicable two-year period, rental use after the deceased’s death does not necessarily prevent a full exemption if the other conditions are satisfied.

If the property is disposed of after two years, income-producing use may prevent a full exemption under the rules that apply from the date of death until disposal.

If you first establish the inherited property as your main residence and later move out, the six-year absence rule may be available in some circumstances while the property produces income. This rule has specific conditions and does not automatically extend the deceased’s two-year inherited-dwelling exemption.

The taxable outcome is not determined simply by counting the days the property was rented. It depends on the relevant main-residence and inherited-property provisions, the property’s use and the beneficiary’s circumstances.

When the Main Residence Exemption Does Not Apply

The main residence exemption may be unavailable or limited where:

• • the deceased did not use the property as their main residence immediately before death;
  • the property was being used to produce assessable income;
  • the property was sold after two years without being the main residence of an eligible person;
  • no qualifying right to occupy existed under the will;
  • the deceased or beneficiary was a foreign resident and the residency rules restrict the exemption;
  • part of the land or a separate structure was sold without the dwelling; or
  • the property qualified as a main residence for only part of the relevant period.

The cost-base treatment then depends primarily on when the deceased acquired the property.

If the deceased acquired it before 20 September 1985, the beneficiary generally receives a market-value cost base at the date of death.

If the deceased acquired it on or after 20 September 1985, the beneficiary generally inherits the deceased’s cost base at the date of death. The market value at death does not automatically become the cost base for an inherited investment property.

CGT is generally considered when the beneficiary later disposes of the property. The calculation may take into account the applicable cost base, capital proceeds, selling costs, capital improvements, exemptions, capital losses and any available CGT discount.

A Worked Example

Maria inherits her mother’s home. Her mother acquired the property after 20 September 1985, lived there as her main residence immediately before death and did not use it to produce assessable income.

The property is worth $800,000 at the date of death. Maria sells the property under a contract that settles within two years of her mother’s death for $870,000.

If the inherited-dwelling conditions are satisfied, the capital gain may be fully exempt, even though the property increased in value after the date of death.

If Maria sells after two years, the outcome cannot be calculated simply by subtracting the date-of-death value from the sale price. The calculation must consider whether the property remained the main residence of an eligible person, whether it was rented or otherwise used to produce income, whether Maria moved into it, the relevant ownership period, selling costs and any available partial exemption.

If Maria’s mother had used the property as an investment property at the date of death, the market-value cost base would not automatically apply. Because the property was acquired after 20 September 1985, Maria would generally inherit her mother’s cost base, subject to the special inherited-asset rules. The main-residence exemption may be unavailable or limited, depending on the property’s use and the other facts.

 

Joint Inheritance: When Multiple Beneficiaries Are Involved

Many people inherit a property alongside a sibling, surviving parent or other co-beneficiary.

Each beneficiary’s CGT position generally relates to their ownership interest. The outcome may differ depending on each beneficiary’s ownership share, residency, occupation of the property, the property’s use and whether an interest is later transferred between beneficiaries.

The result may also depend on whether the legal personal representative sells the property before distributing the proceeds, rather than transferring the property directly to the beneficiaries.

If you have inherited alongside others, this is an area where individual advice is particularly important.

 

How to Avoid Capital Gains Tax on Inherited Property

Understanding the exemptions and timing rules may help you manage the CGT outcome, but no strategy guarantees that CGT will not be payable.

Sell Within the Two-Year Window

If the property qualifies for the inherited-dwelling exemption, disposing of it within the applicable two-year period may provide the clearest pathway to a full exemption.

The two-year rule is not a blanket exemption for every inherited property. The relevant acquisition, residency, ownership and property-use conditions must be checked.

Move Into the Property

Moving into the inherited property may allow the beneficiary’s own main-residence rules to become relevant.

However, moving in does not automatically make the entire gain exempt or extend the deceased’s two-year exemption. The result can depend on when the beneficiary moves in, whether the property becomes their genuine main residence, whether they nominate another dwelling and how the property was used before and after occupation. This approach requires careful planning, particularly around when the property is treated as your main residence for tax purposes.

Consider the Six-Year Absence Rule

If you establish the property as your main residence and later move out, the six-year absence rule may allow you to continue treating it as your main residence while it produces income, provided the statutory conditions are met.

The rule does not automatically extend the deceased’s inherited-dwelling exemption beyond two years. It applies to the beneficiary’s own main-residence circumstances and may be affected if another property is nominated as the beneficiary’s main residence.

Understand What Renting Does to Your Exemption

Renting out the property is not without consequences. Once you begin using the property to produce income, the clock starts running differently. Specifically, once you begin renting, the proportion of the ownership period during which the property is income-producing may become taxable. This can reduce or eliminate the main residence exemption you would otherwise have been entitled to.

This is an important distinction for beneficiaries who are considering renting the property while deciding what to do with it in the long term.

Timing Around Your Marginal Tax Rate

A capital gain is generally included in assessable income in the income year in which the CGT event happens. For a standard property sale, the CGT event generally occurs when the sale contract is entered into rather than at settlement.

If you anticipate a lower-income year, timing the sale may affect the marginal tax rate applied to the taxable capital gain. This should be considered alongside property prices, interest, maintenance, land tax, selling costs and any proposed changes to the CGT rules.

You may also find it useful to understand tax with your financial advisor as part of your broader financial planning.

Consider State-Based Taxes

While CGT is a federal tax, it is worth noting that transferring an inherited property into your name may have stamp duty implications in certain states, and land tax treatment can differ once the property is held in your own name. The rules vary by jurisdiction, so confirming the state-based position as well as the federal CGT position is important.

Non-Resident Beneficiaries

If you are not an Australian tax resident, foreign-residency rules can restrict both the main-residence exemption and the CGT discount.

 

Understand Your Inherited Property CGT Position

Every inherited property situation is different. The CGT outcome may depend on when the deceased acquired the property, how it was used, whether a main-residence exemption applies, how you use it after inheriting it and when you eventually sell.

 

Before selling, renting out, moving into or transferring an inherited property, consider obtaining advice from a registered tax agent or qualified adviser. Understanding the rules early can help you make informed decisions and avoid unexpected tax consequences.

At Precision Wealth Management, our advisers can help you assess the broader financial considerations associated with inherited property and coordinate with appropriate tax professionals where required. Get in touch to discuss your circumstances.