Inheriting a home or a legal interest in one could be the largest windfall gain that many Australians ever experience.
There are provisions in the tax law that mean a taxpayer does not have to pay capital gains tax (CGT) when they sell a house, flat, unit or other dwelling that they have inherited. CGT is the tax paid on the profit from the sale of property or an investment.
(For a quick guide, see the flowchart at the end of this post.)
Inheriting a property
From a tax law perspective, when someone dies a capital gain or loss does not apply when a property passes:
- to the deceased person’s beneficiary
- to the deceased person’s executor or other legal personal representative (LPR), or
- from the deceased’s LPR to a beneficiary.
Selling an inherited property
While generally no CGT applies when assets are distributed to beneficiaries, there may be CGT implications when the executor or beneficiary sells the inherited asset to a third party.
There are different factors that influence whether CGT will apply, including whether the asset was a pre-CGT asset or not. Assets acquired before 20 September 1985 (when CGT was introduced) are considered pre-CGT assets.
For the most part, if the beneficiary sells a dwelling within two years of the deceased’s death, then CGT does not apply. (See “The two-year rule” below).
Post-CGT assets
For dwellings acquired after 19 September 1985 to be exempt from CGT, the beneficiary must generally satisfy that the dwelling:
- was the deceased’s main residence at the time or just before their death
- was not used to produce assessable income at the time of death, and
- is sold within two years of the deceased’s death. (See “The two-year rule” below)
Note that there can be exceptions regarding whether the dwelling was a main residence before death. This includes where the owner, say, was in a nursing home before their death and the main residence was rented out. (This is known as the “absence concession”). Readmore
