Have you ever thought about what happens for tax purposes when you inherit a property? Many people assume that because it is an inheritance, there will be no tax consequences. Unfortunately, that is not always the case. Capital gains tax (CGT) often comes into play when you eventually sell the property, and failing to prepare can result in an unexpected bill.
Losing a loved one is already a difficult experience. Adding tax complications on top of that only makes things more stressful. This is why it is important to understand the rules around CGT before you decide what to do with an inherited property.
When CGT Applies
The good news is that CGT does not apply at the moment you inherit the property. Instead, it usually applies later, when you sell or dispose of it.
Whether or not you will need to pay CGT depends on several factors, including:
- If the deceased person acquired the property before 20 September 1985
- Whether the property was their main residence before they passed away
- If the property was being used to generate rental income at that time
- Whether you sell the property within two years of their death
- Your own residency status when you inherited the property
Each of these details can determine if the property sale will be fully exempt, partially exempt, or fully taxable.
The Two-Year Exemption Period
One of the key rules to remember is the two-year exemption window. If you sell the inherited property within two years of the date of death, you may be able to claim a full CGT exemption.
This can be extended by another 18 months in certain situations where the delay is beyond your control, such as disputes within the estate or delays in the property settlement process. However, the longer you hold onto the property, the greater the chance that CGT will apply later.
Determining the Cost Base
The “cost base” of an inherited property is what the Australian Taxation Office (ATO) uses to calculate any capital gain when the property is sold.
- If the property was purchased by the deceased before 20 September 1985, the cost base is the market value on the date of death.
- If the property was their main residence and not being rented out, and was passed to you after 20 August 1996, the cost base is also its market value at the time of death.
- In other cases, you inherit the deceased’s original cost base, including their purchase price and associated expenses such as stamp duty, legal fees, and renovation costs.
This is where record-keeping becomes important. Sometimes, beneficiaries need to obtain details from the executor, trustee, or accountant to establish the correct cost base.
Main Residence Exemption
The main residence exemption can apply to inherited property, but not always in full.
- If the deceased lived in the property as their home and you sell it within two years, a full exemption may apply.
- If the property is held longer or used to generate rental income, only a partial exemption is likely.
- If the deceased used the property to produce income before their death, this can also reduce the exemption.
The outcome depends on how the property was used both before and after the inheritance.
Examples
Let’s consider a few examples to make this clearer.
Example 1: Full exemption
Michael inherits his mother’s home in Melbourne in July 2022. She had lived there as her main residence until she passed away. Michael sells the property in March 2024, less than two years after her death. Because the property was her main residence and Michael sold within the two-year window, he does not pay any CGT on the sale.
Example 2: Partial exemption due to rental use
Sarah inherited her father’s house in Brisbane in 2018. The property was his main residence before he died. Instead of selling it, Sarah rents it out for five years and then decides to sell it in 2023. In this case, Sarah receives a partial exemption, but she must pay CGT on the period the property was rented.
Example 3: No exemption due to income used by the deceased
David’s aunt purchased a unit in Sydney in 2006 and used it solely as a rental property until her death in 2021. David inherits the property and later moves in, making it his main residence. When he sells the unit in 2026, he cannot claim an exemption for the years it was rented by his aunt. He can only claim a partial exemption for the period it was his own main residence.
Example 4: Joint tenant inheritance
Lisa and her brother Tom own a property in Adelaide as joint tenants. When Tom passes away in 2024, Lisa automatically inherits his share. Because the property was their shared home, Lisa may be entitled to the main residence exemption on Tom’s share as well as her own.
Why This Matters
The way you handle an inherited property can make a significant difference to your tax position. If you sell quickly, you may be entitled to a full exemption. If you hold onto it or rent it out, you may face a CGT bill down the track.
The rules are not always straightforward, and many beneficiaries make costly mistakes by assuming exemptions apply when they do not. If you are unsure, it is wise to get professional advice early, rather than waiting until you are preparing your tax return.
Final Thoughts
Inheriting a property is both a financial opportunity and a responsibility. Understanding CGT rules can help you make informed decisions and avoid unnecessary stress later.
Before you decide whether to sell, rent, or keep the property, consider what the tax implications will be. The difference between acting now or delaying could be tens of thousands of dollars in tax.
A property left to you by a loved one should provide security and support, not unexpected financial headaches. By knowing the rules around CGT, you can protect that inheritance and use it wisely.
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