Inheriting the Family Home: Do You Owe CGT?
Losing a family member is hard enough without also having to navigate the tax consequences of an inheritance. Australia has no inheritance tax as such, but capital gains tax (CGT) can still come into play, and a little planning ahead avoids unnecessary cost later. This article covers the CGT treatment of an inherited main residence.
Inheriting the property itself
When a home owner passes away, their main residence generally transfers to their legal personal representative (executor or administrator) and then to the beneficiary named in the will (or determined by law if there’s no will). You’re taken to have acquired the asset on the date of death, but inheriting it doesn’t itself trigger CGT. CGT only potentially arises if and when you later sell the inherited property. If the property instead passes to a tax-advantaged body (such as a charity) or to a foreign resident under the terms of the will, CGT is assessed as at the date of death instead.
Because the transfer from deceased person to executor/administrator to beneficiary doesn’t create a CGT event, any gain or loss over that transfer is disregarded. It’s only when the beneficiary later sells the property to a third party that CGT potentially applies, and in some circumstances, it can be fully exempt.
When is the CGT exemption available?
Three things determine the outcome:
1. When was the property originally purchased?
- Before 20 September 1985 (a “pre-CGT” asset): there’s no CGT on the original purchase, and no tax on inheriting it. The property’s cost base is reset to its market value at the date of death.
- On or after 20 September 1985 (a “post-CGT” asset): inheriting it still isn’t taxed, but the beneficiary inherits the deceased’s original cost base rather than a reset one.
2. Was the property used to produce income (e.g. rented out) at any point, either before or after the death?
3. Is the property sold within two years of the date of death?
How the exemption works in practice
Broadly:
- If the property was purchased before 20 September 1985, the beneficiary generally gets a full exemption regardless of the two-year timing, provided the property wasn’t used to produce income after the death (partial exemption applies if it was).
- If the property was purchased on or after 20 September 1985, the outcome depends on whether it was the deceased’s main residence right up to the date of death, whether it was used to produce income, and whether the beneficiary sells within two years of the death. Meeting all the relevant conditions gives a full exemption; falling outside them (for example, selling after the two-year window, or income-producing use along the way) can reduce the exemption to a partial one, calculated on a pro-rata basis.
Because the outcome depends on the specific combination of purchase date, income-producing use, and sale timing, it’s worth checking your situation properly rather than assuming either a full exemption or a full tax bill.
If you’ve inherited a property and aren’t sure where you stand, get in touch and we’ll work through the calculation with you based on your actual circumstances.
