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  • Inherited property and CGT

    If you inherit a property and later sell or otherwise dispose of it, you may be exempt from capital gains tax (CGT).

    The same exemption applies if you are the trustee of a deceased estate.

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    Work out if your inherited property is exempt

    The inherited property must include a dwelling and you must sell them together. You cannot get a CGT exemption for land or a structure that you sell separately from the dwelling.

    If you are a foreign resident, or the deceased was a foreign resident, you are generally not entitled to the main residence exemption when you sell the property.

    Work through the following questions to find out if your inherited property is exempt from CGT.

    1. Did the deceased die before CGT started on 20 September 1985?

    Yes: property is fully exempt. However, any major property improvements or additions you make on or after 20 September 1985 may be subject to CGT.

    No: go to question 2

    2. Did the deceased acquire the property before 20 September 1985?

    Yes: go to question 6

    No: go 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 the property their main residence and not used to produce income?

    Yes: go to question 7

    No: property is not fully exempt. You may qualify for a partial exemption

    5. Just before the deceased died, was the property their main residence and not used to produce income?

    Yes: go to question 6

    No: property is not fully exempt. You may qualify for a partial exemption

    6. Did you dispose of the property within 2 years?

    See Disposal within 2 years

    Yes: property is fully exempt

    No: go to question 7

    7. From the time the deceased died, was the property used only as the main residence of you or a person entitled to live in it?

    See Main residence while you own property

    Yes: property is fully exempt

    No: property is not fully exempt. You may qualify for a partial exemption

    Disposal within 2 years

    You meet this requirement if you dispose of the property under a contract that settles within 2 years of the deceased's death.

    It does not matter whether you used the property as your main residence or to produce income during the 2-year period.

    You can extend the 2-year period if disposal of the property is delayed by exceptional circumstances outside your control.

    Example: disposal within 2 years

    Rodrigo was the sole occupant of a flat he bought in April 1990. He did not live in or own another property.

    Rodrigo died in January 2018 and left the flat to his son, Petro.

    Petro rented out the flat and then sold it 15 months after his father died.

    Petro is entitled to a full exemption from CGT as he acquired the flat after 20 August 1996 and disposed of it within 2 years of his father's death.

    End of example

    Main residence while you own property

    You meet this requirement if, from the deceased's death until you dispose of the property, both of the following are true:

    • the property is not used to produce income
    • the property is the main residence of at least one of the following people
      • you, as a beneficiary, if you dispose of the property as a beneficiary
      • the person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased)
      • a person who has a right to occupy the property under the deceased's will.

    The property can continue to be the main residence of one of the above people if they choose to treat it as their main residence (even if they have stopped living in it).

    A property is considered to be your main residence from the time you acquire it if you move in as soon as practicable after that time.

    Example: main residence while you own property

    Peter bought a house prior to 20 September 1985. He died in February 1992 and the house passed to his beneficiary, Bob.

    Under Peter’s will, Patti had a right to occupy the house. However, Patti could not move in until probate and administration of the estate was granted. During this period the house was vacant.

    Probate and administration of the estate was granted in September 1992 and Patti moved in immediately.

    Patti used the house as her main residence until Bob disposed of it in 2019.

    Patti did not own any other property from the date of Peter’s death.

    As Patti moved into the house when it was first practicable to do so, it is treated as Patti’s main residence from the time of Peter’s death until Bob sold it.

    Bob is entitled to a full main residence exemption.

    End of example

    If your property is not fully exempt

    If your property is not or only partially exempt from CGT, to work out your capital gain, you need to know its cost base.

    If your property is partially exempt, you need to work out the proportion of your property that is exempt.

    Foreign residents and inherited property

    When you inherit Australian residential property:

    • if the former owner of the property was a foreign resident for more than 6 years at the time of their death, you cannot claim the main residence exemption for the period they owned it
    • if you have been a foreign resident for more than 6 years when you sell or dispose of the property, you cannot claim the main residence exemption for the period you owned it
    • if you have been a foreign resident for 6 years or less when you sell or dispose of the property, to claim the main residence exemption you must satisfy the life events test.

    If you are not entitled to the main residence exemption, CGT will apply when you sell or dispose of the property.

    Example: inherit property from a foreign resident

    Michael bought an Australian residential property in 2010 and lived in it as his main residence.

    • On 1 July 2013, Michael moved to New York and rented out his Australian property.
    • On 16 August 2020, Michael passed away.
    • Anita, an Australian resident, inherited the property from Michael.
    • Anita did not live in the property and sold it within 2 years.

    At the time of his death, Michael had been a foreign resident for more than 6 years. This means Michael was not eligible for the main residence exemption at the time of his death, despite having lived in the property from 2010 to 2013.

    Anita cannot claim the main residence exemption because Michael was not entitled to it. She must declare the capital gain in her tax return and pay CGT.

    End of example

    Right of survivorship

    When the ownership of a property is shared and an owner dies, their share of the property is transferred based on their co-ownership arrangement.

    Last modified: 04 Aug 2021QC 66054