If you do not qualify for a full exemption from capital gains tax (CGT) for the home, you may be entitled to a part exemption.
You calculate your capital gain or capital loss as follows:
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Non-main residence days
'Non–main residence days' is the number of days that the dwelling was not the main residence.
Deceased acquired the dwelling before 20 September 1985
If the deceased acquired the dwelling before 20 September 1985, non-main residence days are the number of days in the period from their death until settlement of your contract for 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, or
- you, as a beneficiary, if you disposed of the dwelling as a beneficiary.
Deceased acquired the dwelling on or after 20 September 1985
If the deceased acquired the dwelling on or after 20 September 1985, the non-main residence days are the number of days calculated under (a), plus the number of days in the deceased's period of ownership when the dwelling was not their main residence.
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, or
- 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.
Note: A further adjustment may be required if the dwelling was a main residence but was partly used to produce income – for example, if for a period, 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 was settled on 12 February 1995 and she 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 was settled on 27 November 2012.
As Vicki had never used the property as her main residence, Lesley cannot claim a full exemption from CGT. However, as Lesley used the house as her main residence, she is entitled to a part exemption from CGT.
Vicki owned the house for 1,375 days and Lesley then lived in the house for 5,125 days, a total of 6,500 days. Assuming Lesley made a capital gain of $100,000, the taxable portion is:
As Lesley is taken to have acquired the property before 11.45am (by legal time in the ACT) on 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 the 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 in the period from the person's death until you dispose of the dwelling if this lessens your tax liability. You can apply to the Commissioner to be granted an extension of the two-year period.
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You also ignore any non-main residence days before the deceased's death in calculating the capital gain or capital loss if:
- you acquired the dwelling after 20 August 1996
- the dwelling was the deceased's main residence just before their death, and
- the dwelling was not being used to produce income at the time of their death.
Continuing main residence status
If the deceased was not living in the home 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, or
- for a maximum of six years after they ceased living in it, if it was used to produce income after they ceased 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 dwelling ceases to be your main residence rule.
Aldo died in February 2016 and the house passed to his beneficiary, Con, who uses 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 rents out the house and sells 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.
If Con sells 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.
If Aldo had rented out the house after he stopped living in it he could still have chosen to treat it as his main residence under the 'continuing main residence status after dwelling ceases to be your main residence' rule. The house would be considered to have been his main residence until his death because he would have rented it out for less than six years.
If this choice had been made, Con would get an exemption for the period Aldo owned the house.
End of example
Note: Where the CGT event happens in the 2008–09 income year or later years, a trustee or beneficiary may apply to the Commissioner to exercise the discretion to grant an extension of the two-year time starting after the date of death.
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