Inherited property capital gains tax isn’t triggered when you inherit a home. CGT only applies when you later sell or dispose of it, and the gain is fully exempt if the sale settles within 2 years of the death and the deceased either bought the property before 20 September 1985 or lived in it as their main residence (not renting it out) just before they died.
Miss the 2-year window, or inherit a place the deceased had rented out, and part of the gain can become taxable. How much depends on when the deceased bought the property, how it was used before and after the death, and whether anyone lived in it as their home.
This guide follows the ATO’s rules for inherited dwellings. It covers when the full exemption applies, how the cost base works, the extension rules, the foreign resident trap and a worked example comparing a quick sale with renting the property out.
Key takeaways
- Inheriting a property doesn’t create a CGT bill. The CGT event happens when the beneficiary or executor sells or disposes of it.
- A sale that settles within 2 years of the date of death is fully exempt if the deceased bought the property before 20 September 1985, or it was their main residence and not producing income just before they died.
- Renting the property out during those 2 years doesn’t stop the full exemption.
- The cost base is usually the market value at the date of death for a former family home, so a valuation at that date is worth getting.
- If the deceased was a foreign resident for more than 6 years when they died, the main residence exemption isn’t available for their period of ownership.
How does inherited property capital gains tax work at a glance
| Situation | Likely CGT outcome |
|---|---|
| You inherit the property | No CGT. Nothing to report until you sell or dispose of it |
| Sale settles within 2 years of death, deceased bought before 20 September 1985 | Full exemption |
| Sale settles within 2 years of death, it was the deceased’s main residence and not producing income just before death | Full exemption, even if you rent it out in the meantime |
| Kept longer, but lived in only as the home of the deceased’s spouse, a person with a right to occupy under the will, or you as beneficiary | Full exemption (if the deceased-side conditions above are met) |
| Kept longer and rented out | Partial exemption. Part of the gain is taxable |
| The deceased rented it out just before death | No full exemption. Partial exemption may apply |
| Deceased was a foreign resident for more than 6 years at death | No main residence exemption for the deceased’s period of ownership |
When is an inherited property exempt from CGT
The rules sit in section 118-195 of the Income Tax Assessment Act 1997. Which test you need to meet depends on when the deceased acquired the property.
The deceased bought it before 20 September 1985
The deceased’s own ownership was before CGT began, so any growth up to the date of death is never taxed. You get a full exemption if either:
- the sale settles within 2 years of the death, or
- from the death until the sale, the property was only ever the main residence of the deceased’s spouse, a person with a right to occupy it under the will, or the beneficiary who sells it.
There’s no need for it to have been the deceased’s home just before they died. Major improvements made on or after 20 September 1985 can be treated differently, so ask about these if any were done.
The deceased bought it on or after 20 September 1985
For a property that passed to you after 20 August 1996, you get a full exemption if:
- just before the death, it was the deceased’s main residence and wasn’t being used to produce income, and
- either the sale settles within 2 years of the death, or from the death until the sale it was only the main residence of the spouse, a person with a right to occupy under the will, or you as beneficiary.
The deceased can still meet the main residence test after moving out, for example into aged care. They could keep treating it as their main residence indefinitely if it wasn’t rented out, or for up to 6 years if it was. The ATO explains this in its inherited property and CGT guidance.
When does the 2-year period start and end
The 2 years start on the date of death. Probate, the grant of letters of administration and the date the estate is distributed don’t change the start date.
The end point is settlement, not the contract date. The ATO’s wording is that you dispose of the property under a contract that settles within 2 years of the death. A contract signed in month 23 that settles in month 25 misses the window unless an extension applies.
Watch out
Agents and families often count from probate. Count from the date of death and work back from settlement. If the sale is likely to run close, talk to us early about whether an extension will apply.
Can you get an extension to the 2-year rule
Yes, in two ways. Under the ATO’s safe harbour you get an automatic extension, without applying, if all of these are met:
- During the first 2 years after the death, more than 12 months was spent dealing with things like a challenge to ownership or the will, a life interest or right to occupy delaying the sale, a complex estate, a sale contract that was delayed or fell through for reasons outside your control, or COVID-19 restrictions.
- The property was listed for sale as soon as practically possible after those issues were resolved, and the sale was actively managed to completion.
- The sale settled within 12 months of the property being listed.
- Things like waiting for the market to improve, renovating, the convenience of the trustee or beneficiaries, or inaction by the executor didn’t materially contribute to the delay.
- The extension needed is no more than 18 months.
If you can’t meet all of these, you can ask the Commissioner to exercise the discretion to extend. The ATO will only do this for exceptional circumstances outside your control. Details are on the ATO’s extensions to the 2-year ownership period page.
What is the cost base of an inherited property
The cost base is what your capital gain is measured against. For an inherited dwelling, it’s the market value on the date of death if:
- the deceased acquired it before 20 September 1985, or
- it passed to you after 20 August 1996 (not as a joint tenant) and, just before the death, it was the deceased’s main residence and wasn’t being used to produce income.
Otherwise, you inherit the deceased’s cost base at the date of death, such as their purchase price plus buying costs and capital improvements. Your selling costs, such as agent’s commission and legal fees, are added on top. See the ATO’s cost base of inherited assets page.
Tip
Get a written valuation from a registered valuer as at the date of death, even if you plan to sell quickly. If the sale is delayed past 2 years, that valuation becomes the starting point for your CGT calculation.
How is a partial exemption worked out
If you don’t qualify for the full exemption, the taxable part of the gain is worked out on days. The ATO’s formula is:
Capital gain x non-main residence days / total days
- Non-main residence days are the days after the death when the property wasn’t the home of the spouse, a person with a right to occupy under the will, or you, plus any days in the deceased’s ownership when it wasn’t their main residence. You ignore the deceased’s days if they bought it before 20 September 1985, or if it was their main residence and not producing income just before they died.
- Total days run from the death until you dispose of it if the deceased bought it before 20 September 1985. Otherwise they run from the date the deceased acquired it until you dispose of it.
The ATO’s partial exemption for inherited property page has worked examples, and the rule is in section 118-200.
Does the 50% CGT discount apply
For the 12-month ownership test, you can count the time the deceased owned the property if they acquired it on or after 20 September 1985. So an Australian resident individual who sells a property the deceased owned for years will usually get the 50% CGT discount on the taxable part of the gain, even if they sell soon after the death.
Worked example: sell within 2 years or rent it out
The facts
- Margaret bought her house on 1 March 2006 and lived in it as her home until she died on 1 March 2025. She never rented it out.
- It passed to her son Daniel, an Australian resident. A valuer put its market value at the date of death at $950,000.
- Because it was Margaret’s main residence and not producing income just before she died, Daniel’s cost base starts at $950,000, not what Margaret paid.
Option 1: sell within 2 years
- Daniel sells and settlement happens on 15 January 2027, about 22 months after the death.
- Sale price $1,000,000 less cost base $970,000 ($950,000 + $20,000 selling costs) = capital gain of $30,000.
- Settlement is within 2 years of the death, so the whole $30,000 is disregarded. CGT payable: $0.
Option 2: rent it out and sell after 4 years
- Daniel rents the house out from June 2025 and sells, with settlement on 1 March 2029. Nobody lives in it as their home after Margaret’s death.
- Sale price $1,100,000 less cost base $972,000 ($950,000 + $22,000 selling costs) = capital gain of $128,000.
- Non-main residence days: 1 March 2025 to 1 March 2029 = 1,461 days. Margaret’s days are ignored because it was her main residence just before death.
- Total days: 1 March 2006 to 1 March 2029 = 8,401 days, because Margaret acquired it after 20 September 1985.
- Taxable part: $128,000 x 1,461 / 8,401 = $22,260.
- Daniel can count Margaret’s ownership for the 12-month test, so the 50% discount applies: $22,260 x 50% = $11,130 net capital gain, taxed at Daniel’s marginal rate.
Option 2 is still far better than paying tax on the full gain, but it isn’t tax free, and Daniel also has to declare the rent each year. If Daniel had moved in and lived there as his home the whole time instead, the sale would have been fully exempt. You can test your own figures with our capital gains calculator.
What if the deceased was a foreign resident
If the deceased had been a foreign resident for more than 6 years at the time of death, you can’t claim the main residence exemption for the period they owned the property. If it was 6 years or less, the exemption is only available if the life events test is met, such as a terminal medical condition. The same tests apply to you if you are a foreign resident when the property is sold.
These rules apply to disposals after 30 June 2020. The ATO sets them out in main residence exemption for foreign residents. Families with property or relatives overseas should also read our guide to the foreign income tax offset.
What should executors and beneficiaries do first
- Write down the key dates: the date of death, the date the deceased bought the property and when, if ever, it was rented out.
- Get a valuation as at the date of death.
- Decide early whether to sell, keep or rent it, and work out the latest settlement date that keeps the 2-year exemption.
- Keep records of the deceased’s purchase and improvement costs, plus all selling costs.
- Check residency of the deceased and the beneficiaries if anyone has lived overseas.
For more on how CGT works on property generally, see our guides on calculating capital gains tax on property, the main residence exemption and capital gains tax on a rental property. The ATO’s how CGT applies to inherited assets page covers shares and other assets left in a will.
Frequently asked questions
Do you pay capital gains tax when you inherit a property
No. Inheriting the property is not a taxing point for the beneficiary. CGT only comes into play when you later sell or otherwise dispose of it, and even then the gain may be fully or partly exempt.
Does the 2-year rule start from probate or the date of death
It runs from the date of death. Probate and estate distribution dates don’t change it. The sale needs to settle within 2 years of the death, not just have a signed contract by then.
Can you rent out an inherited house and still get the full exemption
Yes, if the sale settles within 2 years of the death and the other conditions are met. The ATO says it doesn’t matter whether the property was used to produce income during that 2-year period.
What is the cost base of an inherited house
If the deceased bought it before 20 September 1985, or it was their main residence and not producing income just before they died (and it passed to you after 20 August 1996), the cost base is its market value at the date of death. Otherwise you take over the deceased’s cost base.
Can I get more than 2 years to sell an inherited home
Possibly. An automatic safe harbour extension of up to 18 months applies if all the ATO’s conditions are met. Otherwise you can ask the Commissioner to extend the period, but only for exceptional circumstances outside your control.
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Talk to a registered tax agent
Selling or keeping an inherited property is a big decision, and the timing can change the tax result by thousands of dollars. Speak with a registered tax agent at Nanak Accountants & Associates on 1300 626 258, or book a consultation with our team. Our capital gains tax accountants can work out your cost base, check whether the exemption applies and prepare the CGT schedule for your return.
This article is general information only and is not personal financial or tax advice. Information checked against ATO and ATO legal database sources on 5 October 2026.
