Inherited Property and Capital Gains Tax (CGT): What You Need to Know

When you inherit a property, one of the most important questions is: Will I need to pay capital gains tax (CGT) when I sell it?  In some cases, inherited property can be fully exempt from CGT, while in others only a partial exemption applies.

This article explains the key rules, including how the main residence exemption works, what happens when there is a right to occupy, and how foreign residency affects your position.

Is an Inherited Property Exempt from CGT?

The general rule is: if you inherit a property that includes a dwelling and you later sell it, you may be fully exempt from CGT if certain conditions are met.  The same rules apply if you are the trustee of a deceased estate selling the property.

Important: The exemption applies only if you sell the dwelling together with the land it is on. Selling land or structures separately usually does not qualify.

Key Questions to Determine Exemption

To find out whether your inherited property may be CGT-exempt, work through the following questions:

1. Did the deceased die before 20 September 1985 (when CGT started)?
   • Yes: The property is fully exempt.
   • No: Continue to question 2.

    

2. Did the deceased acquire the property before 20 September 1985?
   • Yes: Go to question 6.
   • No: Continue to question 3.

    

3. Did you inherit the property after 20 August 1996?
    
   • Yes: Go to question 5.
   • No: Go to question 4.

    

4. From the time the deceased acquired the property until their death, was it their main residence and not income-producing?
   • Yes: Go to question 7.
   • No: The property is not fully exempt. A partial exemption may apply.

    

5. Just before death, was the property the deceased’s main residence and not used to produce income?
   • Yes: Go to question 6.
   • No: The property is not fully exempt. A partial exemption may apply.

    

6. Did you dispose of the property within 2 years of death?
   • Yes: The property is fully exempt.
   • No: Go to question 7.

    

7. From the date of death until disposal, was the property used only as the main residence of one of the following?
   • 1. The deceased’s spouse (unless permanently separated)
     2. A person with a right to occupy under the Will
     3. You, as the beneficiary

    

   • Yes: The property is fully exempt.
   • No: The property is not fully exempt. A partial exemption may apply.

    

Two-Year Disposal Rule

You are entitled to a full CGT exemption if you sell the property within two years of the deceased’s death, regardless of whether it was rented or used to produce income during that period.

The Australian Taxation Office (ATO) may extend this period if delays in selling were caused by exceptional circumstances outside your control.

Example:
Marco died in February 2025 and left his flat to his daughter, Mary. Mary rented out the flat, then sold it 15 months later. Because she sold it within two years, she is entitled to a full CGT exemption.

Main Residence While You Own the Property

You can also qualify for a full exemption if, from the deceased’s death until you sell, the property was used as the main residence of one of the following:

• The deceased’s spouse (unless permanently separated)
• A person with a right to occupy under the Will
• You, as a beneficiary

 
Even if the person stops living there, the property can still be treated as their main residence if they elect to do so.  It is also treated as a main residence if you move in as soon as practicable after inheriting it.
 
Example:
Morgan died in February 1993 and his house passed to Michael. Under the Will, Angela had a right to occupy.  Probate was granted in September 1993 and Angela moved in immediately. She lived there until 2024, when Michael sold it. Because Angela occupied it as her main residence from the first practicable time, Michael is entitled to a full exemption.

When the Property Is Not Fully Exempt

If the property does not meet the full exemption conditions, you may still be eligible for a partial exemption.  To calculate CGT, you will need:

• The cost base (generally the market value at the date of death), and
• The proportion of time the property was not exempt (e.g., rented or not used as a main residence).

Foreign Residents and Inherited Property

Stricter rules apply for foreign residents:

• If the deceased was a foreign resident for more than six years before their death, the main residence exemption does not apply.
• If you are a foreign resident for more than six years when you sell, you also cannot claim the exemption.
• If you have been a foreign resident for six years or less, you must satisfy the life events test to qualify.

 
Example:
James, a foreign resident for more than six years, died in August 2025.  Marie inherited his Australian property but did not live there and sold it within two years.  Because James was not entitled to the main residence exemption at death, Marie cannot claim it and must pay CGT.

Key Takeaways

• A full CGT exemption is most common when the property is sold within two years or used as the main residence of an eligible person after death.
• Properties owned by foreign residents or those that are rented out may only receive partial or no exemption.
• Executors and beneficiaries should keep detailed records, including the date of death market value, occupancy history, and any income-producing use.