• Calculating a partial exemption – inherited dwelling

    If you don't qualify for a full exemption from capital gains tax (CGT) for an inherited dwelling, you may be entitled to a partial exemption.

    You calculate your capital gain or loss as follows:

    'Capital gain or loss amount' multiplied by 'Non-main residence days' divided by 'Total days'

    On this page:

    Non-main residence days

    If the deceased acquired the dwelling:

    • before 20 September 1985, 'non-main residence days' is the number of days, in the period from their death until settlement of the sale of the dwelling, when it was not the main residence of one of the following:
      • a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)
      • an individual who had a right to occupy the dwelling under the deceased's will
      • you, as a beneficiary, if you disposed of the dwelling as a beneficiary
       
    • on or after 20 September 1985, 'non-main residence days' is the number of days calculated above plus the number of days in the deceased's period of ownership when the dwelling was not their main residence.

    Total days

    If the deceased acquired their ownership interest:

    • before 20 September 1985, 'total days' is the number of days from their death until you disposed of your ownership interest
    • on or after 20 September 1985, 'total days' is the number of days in the period from when the deceased acquired the dwelling until you disposed of your ownership interest.

    A further adjustment may be required if the dwelling was a main residence but was partly used to produce income – for example, if part of it was rented out or used as a place of business for a period.

    Example: Part exemption

    Vicki bought a house under a contract that settled on 12 February 1995 and used it solely as a rental property. When she died on 17 November 1998, the house became the main residence of her beneficiary, Lesley. Lesley sold the property under a contract that settled on 27 November 2016.

    As Vicki had never used the property as her main residence, Lesley can't claim a full exemption from CGT. However, as Lesley used the house as her main residence, she's entitled to a part exemption from CGT.

    Vicki owned the house for 1,375 days and Lesley then lived in the house for 6,586 days, a total of 7,961 days. Assuming Lesley made a capital gain of $200,000, the taxable portion is:

    $200,000 × (1,375 ÷ 7,961) = $34,544

    As Lesley is taken to have acquired the property before 21 September 1999 and entered into the contract to sell it after that time, and held the property for at least 12 months, she can use either the indexation or discount method to calculate her capital gain.

    End of example

    If you dispose of your ownership interest in the dwelling within two years of the person's death, you can ignore the main residence days and total days during your period of ownership.

    You ignore any non-main residence days before the deceased's death if:

    • the dwelling passed to you after 20 August 1996, and
    • just before the deceased died it was their main residence and was not being used to produce income.

    Continuing main residence status

    If the deceased was not living in the dwelling at the date of their death, they or their trustee may have chosen to continue to treat it as their main residence. This may happen if, for example, the person moved to a nursing home. You may need to contact the trustee or the deceased's tax adviser to find out whether this choice was made. If it was, the dwelling can still be regarded as the deceased's main residence:

    • for an indefinite period, if the dwelling was not used to produce income after the deceased stopped living in it
    • for up to six years after they ceased living in it, if it was used to produce income after they stopped living in it.

    Example: Continuing main residence status

    Aldo bought a house in March 1995 and lived in it. He moved into a nursing home in December 2010 and left the house vacant. He chose to treat the house as his main residence after he ceased living in it, under the 'continuing main residence status after moving out' rule.

    Aldo died in February 2016 and the house passed to his beneficiary, Con, who used the house as a rental property.

    As the house was Aldo's main residence immediately before his death and was not being used to produce income at that time, Con can obtain a full exemption for the period Aldo owned it.

    If:

    • Con rented out the house and sold it more than two years after Aldo's death, the capital gain for the period from the date of Aldo's death until Con sells it is taxable
    • Con sold the house within two years of Aldo's death, he can ignore the main residence days and total days between Aldo's death and him selling it, which would give him exemption for this period
    • Aldo had rented out the house after he stopped living in it he could still have chosen to treat it as his main residence – the house would be treated as his main residence until his death because he would have rented it out for less than six years – in which case Con would still get an exemption for the period Aldo owned the house.
    End of example

    See also:

    Inheriting a dwelling from someone who inherited it themselves

    The formula for calculating the partial main residence exemption is adjusted if the deceased also acquired the dwelling on or after 20 September 1985 as a beneficiary (or trustee) of a deceased estate. The main residence exemption is calculated according to the number of days the dwelling was the main residence of you and the previous beneficiaries.

    Example: inheriting a dwelling that was previously inherited

    Ahmed acquired a dwelling after 20 September 1985. The dwelling was his main residence from the time he acquired it until he died, a period of 3,700 days.

    Ahmed left the dwelling to his son, Fayez.

    Some years later, Fayez died. He had owned the dwelling for 2,600 days and it wasn’t his main residence at any time during this period.

    The dwelling was left to Mardianah under Fayez’s will.

    Mardianah sold the dwelling in 2016–17 and made a capital gain of $100,000. She owned the dwelling for 750 days and it wasn’t her main residence at any time during that period.

    The assessable proportion of Mardianah's capital gain is the number of days that the dwelling was not a main residence divided by the total number of days from when Ahmed first acquired the dwelling until Mardianah sold it:

    $100,000 × ((2,600 + 750) ÷ (2,600 + 750 + 3,700)) = $47,518

    Because the combined period Ahmed, Fayez and Mardianah owned the dwelling was more than 12 months, Mardianah can reduce her $47,518 capital gain by the 50% discount (after deducting any capital losses).

    End of example

    Death during construction

    If the deceased entered into a contract to construct, repair or renovate a dwelling on land they already owned, and died before the dwelling was finished or before they had lived in it for three months, the trustee can choose that the dwelling and land be treated as the deceased's main residence for up to four years before the person died.

    If the trustee makes this choice, no other dwelling can be treated as the deceased's main residence during that time.

    See also:

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    Last modified: 17 Jul 2017QC 52258