Why this topic confuses smart people
Inheriting a home usually arrives with two things you didn’t ask for: emotion and admin. It feels simple on the surface. There’s a house. Someone needs to keep it, rent it, or sell it. Then you hit the tax rules and everything slows down. Does the two year clock start at death or probate. Is there tax if you sell quickly. What if the home was rented for a while. What value becomes your cost base. Can the ATO extend the deadline if settlement gets delayed.
The good news is the rules are knowable. In most estates there’s a straightforward path to either a full exemption or a clean, predictable calculation. If you’re methodical, you can map your options in an afternoon and avoid surprises.
Quick orientation
- CGT doesn’t normally apply at the moment you inherit. It may apply when the legal personal representative or a beneficiary sells later. The ATO groups the rules for inherited assets in one place and provides decision tools that mirror the steps below. (Australian Taxation Office)
- A full exemption is possible in common scenarios, especially where the property was the deceased’s main residence and not used to produce income, and the sale settles within two years of death, subject to the extension discretion. (Australian Taxation Office)
- If a full exemption doesn’t fit, partial exemptions and clear cost base rules usually get you to the right number without drama. (Australian Taxation Office)
Financial planning considerations
Even when the tax piece is simple, the decision isn’t only about tax. If you’re keeping the property, you’ll want to think about cash buffers for rates and repairs, whether to hold or clear debt, and how the home fits with your wider investment plan. If you’re selling, you’ll want a plan for the proceeds that’s easy to execute and doesn’t turn into drift.
The big questions, answered in plain English
1) When does CGT actually apply
Not at death. The rollover at death usually means no CGT then. A CGT event can occur later when the executor sells during administration, or when a beneficiary sells after the property has been transferred to them. The ATO’s inherited assets guidance sets this out and links to the decision tree for dwellings. (Australian Taxation Office)
2) What is the two year rule and why does everyone talk about it
If the deceased’s home was their main residence just before death and it wasn’t being used to produce income, a sale that settles within two years of death can be fully exempt from CGT. This two year window is the simplest path to a clean outcome. If you can’t meet it due to circumstances outside your control, the ATO can grant an extension on request. (Australian Taxation Office)
3) What if the deceased bought the home before 20 September 1985
That’s a pre-CGT acquisition for them. Your cost base generally becomes the market value at the date of death. You’ll only have CGT if you later sell for more than that value, subject to main residence rules. The ATO’s cost base page explains the date-of-death valuation approach for pre-CGT assets. (Australian Taxation Office)
4) What if the deceased bought the home on or after 20 September 1985
You usually inherit their cost base unless the special market value rule applies, for example where the property passed to you after 20 August 1996 and just before death it was the deceased’s main residence and not being used to produce income. In that case the first element of your cost base is market value at death. (Australian Taxation Office)
5) What if the home was rented before or after death
You may still get a full exemption if the property sells within two years and the conditions are met, or you may need to calculate a partial exemption that removes the main residence periods and taxes the non-exempt slice. The ATO provides an explicit partial exemption method for inherited dwellings. (Australian Taxation Office)
6) What if the deceased moved out before they died
A dwelling can still count as the deceased’s main residence even if they moved into care or elsewhere, depending on the facts. The ATO’s main residence guidance for inherited homes recognises continuing main residence status in specific cases. (Australian Taxation Office)
How the decision tree works
You can sketch your position quickly with five steps.
Step A: When did the deceased acquire the property
- Before 20 Sep 1985. Your starting point is date-of-death market value as cost base. (Australian Taxation Office)
- On or after 20 Sep 1985. Move to Step B.
Step B: What was the property at death
- The deceased’s main residence and not being used to produce income. Strong chance of full exemption if sold within two years, or market value at death as cost base if not sold within two years. (Australian Taxation Office)
- A rental, vacant land, or otherwise not the main residence. Expect either a partial exemption or normal CGT rules. (Australian Taxation Office)
Step C: Who sells and when
- Executor sells within two years. Often fully exempt if the criteria are met. (Australian Taxation Office)
- Beneficiary sells after transfer. Exemption may still apply, or you calculate the taxable portion based on use and time. (Australian Taxation Office)
Step D: Do you qualify for an extension
If you miss the two year settlement deadline due to delays outside your control, you can ask the ATO to extend the period. They’ll consider factors like disputes, complex estates, or external delays. (Australian Taxation Office)
Step E: If not fully exempt, calculate the partial exemption
Use the ATO’s method to apportion the gain for any non-main residence periods or income-producing use. Keep records that support your numbers. (Australian Taxation Office)
Cost base rules you can rely on
The cost base is what you measure your gain or loss against. For inherited dwellings, there are special rules that stop you from being taxed on value that existed before you were involved.
When market value at death becomes your cost base
- If the property passed to you after 20 Aug 1996, and just before death it was the deceased’s main residence and not producing income.
- If the deceased acquired it before 20 Sep 1985.
The ATO sets this out clearly in its cost base guidance. (Australian Taxation Office)
When you inherit the deceased’s cost base
- If the property wasn’t the main residence at death, or it was being used to produce income, or the preconditions for market value treatment don’t apply. The decision tool on inherited property points you to the correct branch. (Australian Taxation Office)
What gets added to the cost base
- Selling costs like agent fees and advertising.
- Legal and conveyancing fees.
- Certain ownership costs not already claimed as deductions.
These general CGT cost base elements still apply, alongside inheritance-specific rules in the ATO’s inherited assets section. (Australian Taxation Office)
The main residence exemption for inherited homes
You can often achieve a full exemption in three common ways.
Path 1: Two year sale
If the deceased’s home was their main residence and wasn’t producing income just before death, and settlement of your sale occurs within two years of death, the gain is usually fully exempt. (Australian Taxation Office)
Path 2: Occupation by the right person
If, from death until settlement, the home was the main residence of you as beneficiary, or someone with a right to occupy under the will, the exemption may apply even if you sell after two years. The details are in Subdiv 118-B and the ATO’s inherited home examples. (Australian Taxation Office)
Path 3: ATO extension
If you miss the two year window due to circumstances outside your control, you can apply to extend. The ATO lists factors it considers, like delayed probate or contract fallovers. (Australian Taxation Office)
Financial planning considerations
If a full exemption is likely, it’s worth asking whether a fast, clean sale is better than a longer hold that creates taxable periods. If you keep the property, be clear on holding costs, rental plans, and buffers. If you sell, plan exactly how the proceeds will be used, so money doesn’t sit idle or drift into the wrong bucket.
When you’ll need the partial exemption
A partial exemption applies when a full exemption doesn’t fit, usually because the dwelling wasn’t the main residence for all of the relevant period, or because it was used to produce assessable income at some stage. The ATO’s method apportions your gain between exempt and taxable periods. (Australian Taxation Office)
What drives the calculation
- Total ownership period counted for this purpose.
- Days the dwelling qualified as a main residence under the rules.
- Days it didn’t, including rental or vacant periods that don’t qualify.
- Whether special rules apply for first use to produce income or for inherited periods where someone else’s occupancy matters. Legislation in Subdiv 118-B covers these mechanics and the ATO provides worked examples. (AustLII)
Record-keeping that saves you tax
- Date-stamped evidence of occupancy and vacancy.
- Rental schedules and agent statements.
- Rates, insurance, and utilities for the periods that support main residence status.
- Valuation at date of death if market value forms your cost base.
The ATO’s pages explain what counts and how to apply the method. (Australian Taxation Office)
Renting the inherited home, moving in, or doing both
You generally have four paths, each with different tax outcomes.
1) Sell within two years
Often the cleanest tax outcome when the deceased’s home qualified and wasn’t producing income. Keep an eye on the extension discretion if settlement slips. (Australian Taxation Office)
2) Move in, then sell
If you make the home your main residence from inheritance until sale, you may still qualify for a full exemption even if the sale is after two years, provided the other conditions are met. Check the facts carefully. (Australian Taxation Office)
3) Rent it out immediately
You’ll usually be heading for a partial exemption. Market value at death may be your cost base in specific cases, otherwise you inherit the deceased’s cost base. The ATO’s inherited property decision flow covers these branches. (Australian Taxation Office)
4) Keep it long term
Once you keep an inherited dwelling for years, treat it like any other property investment. Make sure your cost base is correct, track capital improvements, and understand how your main residence choices affect outcomes. If you later move in, the usual main residence rules and the six year absence rule may interact with the inherited period. Refer to the ATO’s guidance on treating a former home as your main residence for the general rule set. (Australian Taxation Office)
Financial planning considerations
If you’re leaning toward renting, model cash flow with conservative assumptions for repairs and vacancy. If you’re leaning toward living in it, consider the opportunity cost versus your current home and the transaction costs of moving twice. In both cases, avoid letting the tax tail wag the dog. The right lifestyle and liquidity usually beat a marginal tax edge.
Simple worked examples
These are illustrations to show how the rules play out. They’re not advice and they ignore some costs to keep the point clear.
Example 1: Full exemption inside two years
A parent’s home was their main residence, never rented. Date of death value is $1,200,000. The executor signs a contract at $1,300,000 and settlement occurs 18 months after death. The sale is fully exempt. There’s nothing to include in anyone’s return for this property. The two year path is satisfied. (Australian Taxation Office)
Example 2: Market value cost base, sale after two years
The deceased bought the home in 1990. It was their main residence and not used to produce income just before death. Value at death is $900,000. It’s transferred to a beneficiary who holds it for three years, then sells for $1,050,000 without ever living there. The beneficiary’s cost base is the date-of-death market value. The taxable gain is roughly $150,000 less any selling costs and eligible adjustments, and the CGT discount may apply if held for 12 months or more. (Australian Taxation Office)
Example 3: Partial exemption where the home was rented
The deceased bought in 2005, lived there, then rented it for the final two years of life. The executor sells 30 months after death. You apportion the total gain so the main residence periods are exempt and the rental periods count toward the taxable slice, using the ATO’s partial exemption method. (Australian Taxation Office)
Example 4: Pre-CGT purchase by the deceased
The deceased bought in 1980. Value at death is $800,000. You sell two years later for $820,000. Your cost base is the date-of-death value. The $20,000 gain is the starting point, then you adjust for selling costs and discount if eligible. If the home qualified for a full exemption and you sold within two years, the gain may be fully exempt instead. (Australian Taxation Office)
Co-ownership and the right of survivorship
If the deceased owned the property as a joint tenant, their interest usually passes to the surviving owner automatically. For tenants in common, a defined share passes under the will. The ATO’s inherited property page covers how co-ownership interacts with the exemption and calculation methods. Conveyancers will also confirm how title moved so your records match reality. (Australian Taxation Office)
Financial planning considerations
Where siblings inherit together, a clean buy-out can be better than a long co-ownership. It reduces admin and the risk of different cash needs forcing a sale at the wrong time. If a buy-out isn’t feasible, write ground rules for repairs, rent, and exit so family relationships don’t end up carrying the dispute.
Renovations and capital improvements
Renovations after you inherit can increase your cost base if you later sell. Keep invoices and dates. If significant improvements were made by the deceased after 20 Sep 1985 on a pre-CGT property, the ATO treats you as having acquired a single asset whose cost base reflects both the improvement cost base and the pre-CGT land value at death. This prevents odd outcomes and is spelled out in the cost base page for inherited assets. (Australian Taxation Office)
Financial planning considerations
Renovating for a sale can make sense, but only if the market and timeline cooperate. If you’re chasing the two year exemption, make sure a long reno doesn’t push settlement past the deadline unless you’re confident about an extension.
Getting the valuation right
When you need a date-of-death market value, your choice of valuation method should be defensible. Many families use a professional sworn valuation. Others rely on comparable sales and agent letters if the facts are simple. The ATO doesn’t mandate a single method for every case, but your goal is to be reasonable and well-documented. If in doubt, go formal.
Financial planning considerations
A professional valuation is a small cost relative to the future tax you might save on a large asset. It also avoids arguments inside the family and with future buyers. If you keep the property long term, tuck the valuation into your records so the cost base evidence is ready years later.
The two year rule, extensions, and how to think about time
The rule is about settlement, not contract date. Work backwards from the death date, and set milestones for listing, finance, and conveyancing. If administration delays, title issues, disputes, or other problems outside your control push settlement past the deadline, you can seek an extension from the ATO. They publish the factors they consider, and many estates qualify when the facts are strong. (Australian Taxation Office)
Financial planning considerations
If a full exemption is valuable and your sale sits close to the deadline, decide early whether to press for a quick settlement, request an extension, or shift strategy. Don’t rely on a last-minute scramble.
Record-keeping that makes the tax return easy
- Probate and letters of administration.
- Date of death, and date you or the executor took control.
- Title documents, transfer statements, and settlement statements.
- Date-of-death valuation if required.
- Evidence of main residence use, or rent schedules if applicable.
- All costs that contribute to your cost base.
- Decision notes for any extension request and ATO correspondence.
These are the documents your tax agent will want, and they support any calculation method from the ATO’s inherited property pages. (Australian Taxation Office)
State taxes and practical wrinkles
CGT is federal. Transfer duty and land tax are state based. Many transfers from a deceased estate receive concessional treatment, but rules vary, so check your state before you change ownership or structure. If you plan to live in the home before selling, make sure your council and land tax settings reflect reality.
Financial planning considerations
Don’t let a small state tax saving dictate a poor bigger picture decision. The large dollars are usually in the asset and in your future plan for the proceeds.
Where a financial planner fits
Lawyers settle the estate and draft documents. Accountants prepare the return and ensure the CGT is calculated correctly. A financial planner sits next to those roles and helps the family turn the property decision into a plan for the money. That usually looks like:
- A 24 month cash flow map so rates, repairs, and holding costs don’t blow up the family budget.
- A simple investment policy for sale proceeds that balances debt reduction, buffers, and long term investing.
- A clean ownership structure for new investments that doesn’t create admin you’ll resent later.
- A practical automation plan so contributions, offsets, and rebalancing happen without dramas.
This is where our work at Pivot Wealth tends to help. We keep it simple, numbers backed, and easy to run.
Frequently asked questions
Is there CGT when I inherit the house
Generally no. CGT happens when the executor or a beneficiary later sells. The ATO’s inherited assets guidance explains the rollover at death. (Australian Taxation Office)
If I sell inside two years, is it always tax free
Often, if the home was the deceased’s main residence and not producing income just before death. Settlement must occur within two years, although the ATO can grant extensions in appropriate cases. (Australian Taxation Office)
What value becomes my cost base
It’s either the deceased’s cost base or the market value at death. Market value at death applies in common situations, like pre-CGT acquisitions and certain post-1996 main residence cases. The ATO’s cost base page lists the triggers. (Australian Taxation Office)
What if the property was rented before the sale
You may get a partial exemption. The ATO’s method apportions the gain between exempt and taxable periods based on use and time. (Australian Taxation Office)
Can I live in the home after I inherit and still avoid tax
Often yes, if from death until settlement it’s the main residence of you as beneficiary, or a person with a right to occupy under the will. Details and examples are in the ATO’s inherited home guidance. (Australian Taxation Office)
Can the ATO extend the two year period
Yes, where circumstances outside your control caused the delay. The ATO publishes the factors it considers and how to apply. (Australian Taxation Office)
What happens if we inherit as joint tenants
A joint tenant’s interest usually passes to the survivor automatically. Tenants in common pass through the will. The ATO’s inherited property pages explain how that affects CGT. (Australian Taxation Office)
A step-by-step action plan
Week 1: get organised
- Gather probate documents, title info, and the deceased’s purchase and use history.
- Check rental periods, if any, and whether the home qualified as the deceased’s main residence at death.
- Book a valuation if market value at death will matter.
Week 2: map your options
- Draw the decision tree for your facts.
- If a full exemption is likely, confirm whether a two year sale is practical.
- If not, quantify partial exemption outcomes so the family sees the true difference.
Week 3: choose a path
- Decide whether to keep, rent, move in, or sell.
- If selling, lock a timeline that respects the two year settlement date and build in buffers.
- If keeping, write down the holding plan, including repairs, insurance, and buffers.
Week 4: line up the personal plan
- If selling, set exact rules for how proceeds will clear debt, fund buffers, and be invested.
- If keeping, size the cash buffer and confirm your investment contribution plan continues so other goals don’t stall.
- Update wills, nominations, and powers of attorney if your balance sheet is about to change.
Any time delays hit
- If settlement will miss the two year date, speak to your tax agent about an ATO extension request and document the reasons.
Bringing it together
CGT on inherited property in Australia looks complex until you run the checklist. Start with the deceased’s facts, test the two year path, confirm your cost base, and, if needed, calculate the partial exemption by the book. Keep records and dates tight. Once the tax outcome is clear, make the property decision the same way you’d run any other investment decision. Set a plan that fits your life, not just the tax return.
If you want help stitching the personal plan to whatever path you choose, that’s the work we do every day. The aim is simple. Fewer surprises, calmer decisions, and a plan that runs itself when life gets busy.
If you want some help with your money, Ben has created a free seven-day challenge you can use to get more out of your money you can join here and permanently level up your money in just seven days. And if you want to learn how financial advice can help you, you can schedule a quick call here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.