Capital Gains Tax on Inherited Property in Australia
Inheriting property does not trigger CGT, but selling it might. The 2-year rule, cost base, pre-CGT property and the main residence exemption, explained.
By Timothy Hirou GaschereauPublished 11 min read
Try it yourself
Inheriting a property arrives wrapped in grief and paperwork at the same time. You are dealing with a loss, and suddenly there are solicitors, an executor, and a house to figure out. The last thing you want is a surprise tax bill on top.
Here is the good news: you do not pay capital gains tax on inherited property the moment it lands in your name. CGT is triggered when you sell, not when you inherit. The catch is that the rules deciding how much you pay (if any) are genuinely fiddly, and getting them wrong can cost tens of thousands. This guide cuts through it. General information only, so get a tax accountant on your specific situation.
🎯 The essential: You pay no CGT when you inherit, only when you sell. The biggest variable is whether the place was the deceased's main residence or an investment: that sets your cost base (value at death vs their original purchase price). If it was their main home and not income-producing, the 2-year rule lets you sell CGT-free within 2 years of death. Pre-CGT homes (bought before 20 September 1985) can be fully exempt. And the 50% discount almost always applies.
You do not pay CGT when you inherit, only when you sell
Under Australian tax law, inheriting a property is not a CGT event for the beneficiary. You owe nothing the day it transfers into your name. The estate may have its own obligations, which the executor handles, but your CGT clock relates to when you later sell, gift or dispose of the property. New to CGT generally? Start with how capital gains tax works in Australia.
The single biggest variable: pre-CGT or post-CGT
Before anything else, find one date: when did the deceased originally buy the property?
| Pre-CGT property | Post-CGT property | |
|---|---|---|
| Original purchase | Before 20 Sep 1985 | On or after 20 Sep 1985 |
| CGT on sale? | Potentially fully exempt | Standard CGT rules apply |
| Cost base | Market value at date of death (if sold promptly) | Depends how it was used |
| Key risk | Income use, or a long hold after death | Inheriting the full gain history |
A pre-CGT property (bought before 20 September 1985) that was never used to produce income can be fully CGT-exempt if you sell within a reasonable time. A post-CGT property follows standard rules, and then the key question becomes your cost base. Check the original contract, the title, or ask the estate's solicitor.
How the cost base is set (this decides your bill)
For post-CGT property the cost base is the number that matters. There are two very different scenarios.
Scenario 1: it was the deceased's main residence (and not used to produce income). Your cost base is the market value at the date of death. You only pay CGT on gains after death. Example: the family home was bought in 2005 for $400,000, was worth $900,000 at death, and you sell 3 years later for $1,000,000. Your gain is $100,000, halved by the 50% discount to $50,000, roughly $18,500 tax at a 37% marginal rate. The deceased's $500,000 gain is effectively sheltered.
Scenario 2: it was an investment property. Your cost base is the deceased's original purchase price, so you inherit their whole gain history. Example: bought in 2010 for $350,000, worth $750,000 at death, you sell 2 years later for $800,000. Your gain is $450,000, halved to $225,000, roughly $83,250 tax at 37%.
The 50% discount applies in both cases because the combined holding period (the deceased's years plus yours) is well over 12 months. This is exactly the mechanic in our capital gains tax on property guide.
The main residence exemption for inherited homes
There are three pathways, and they work very differently.
Pathway 1: the 2-year rule. If the dwelling was the deceased's main residence just before death and was not producing income, you have 2 years from the date of death to sell it completely CGT-free. It does not matter whether you live in it, rent it briefly, or leave it empty during those 2 years. The clock is measured to the settlement date, not the contract date. The ATO can extend it for genuine hardship (estate disputes, probate delays, serious illness), and there is a safe-harbour extension of up to 18 months in qualifying cases, but do not assume you will get one. The clock starts the day the person dies, not when probate is granted, so do not dawdle.
Pathway 2: you move in. Miss the 2 years and you can still access the exemption by making the property your own main residence. You then get a partial exemption, pro-rated for the time it was your home versus the total time you owned it. See our main residence and 6-year rule guide for how the main residence mechanics work.
Pathway 3: it was an investment for the deceased. Then the exemption does not apply to their ownership period at all: you inherit the full CGT history. Moving in later only shelters the gain from that point forward.
What if it was only partly the main residence?
If the deceased used part of the home to produce income (a rented room, a home business, a tenanted granny flat), only a partial exemption applies. The ATO apportions it based on the floor area used to earn income and how long that lasted. It gets complicated fast, so get an accountant involved early. Estate and will planning matters here too: our guides to estate planning and writing a will help the people you leave behind avoid nasty surprises.
Common mistakes that cost beneficiaries money
- Assuming there is no CGT because “it was Mum's home”. If it was ever an investment, or never the deceased's main residence, the full history applies. Check, do not assume.
- Missing the 2-year window. Two years sounds like plenty until probate delays and family disagreements eat into it. Start early.
- Not getting a formal valuation at the date of death. If it was the deceased's home, that value is your cost base. Without a registered valuer's figure, you are guessing, and the ATO can challenge it.
- Forgetting the 50% discount. If the combined holding period tops 12 months, you halve the taxable gain. Always check.
- Not checking whether it is pre-CGT. A home bought before 20 September 1985 could be fully exempt. Check the date first.
Frequently asked questions
Do I pay CGT when I inherit a property in Australia?
No. Inheriting a property is not a CGT event for the beneficiary. You do not owe the ATO anything at the point of inheritance. CGT becomes relevant when you sell, gift, or otherwise dispose of the property, and the cost base, exemptions and discount then determine how much you pay.
What is the 2-year rule for inherited property CGT?
If the deceased's home was their main residence just before death and was not used to produce income, you have 2 years from the date of death to sell it completely CGT-free. The 2 years is measured to the settlement date of the sale, not the contract date. The ATO can extend this in exceptional circumstances, but extensions are not guaranteed.
What is the cost base for an inherited property?
It depends on how the deceased used the property. If it was their main residence and not used to produce income, your cost base is the market value at the date of death. If it was an investment property, your cost base is the deceased's original purchase price. The difference can be tens of thousands of dollars in tax.
Does the 50% CGT discount apply to inherited property?
Yes, in most cases. The discount applies if the combined holding period, being the deceased's years of ownership plus your own, exceeds 12 months. Since most inherited properties have been owned well over a year, the discount almost always applies and halves your taxable gain.
What if I inherit a pre-CGT property?
If the deceased bought the property before 20 September 1985, it is a pre-CGT asset. If you sell within a reasonable time and it was never used to produce income since the deceased acquired it, you may be fully exempt from CGT. If it was used to produce income, or you hold it and it keeps rising, CGT may apply on the post-death gain.
What if I inherit an investment property?
This is the most expensive scenario. Your cost base is the deceased's original purchase price, so you inherit their entire gain history. The main residence exemption does not apply to their period of ownership. You pay CGT on the full gain from the original purchase to your sale, less the 50% discount if the combined holding period exceeds 12 months.
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Sources
This article is general information only, not tax, financial or legal advice. Inherited property CGT rules are complex and set by the ATO, and they can change. Speak with a registered tax agent who deals with deceased estates before acting.
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General information only. This article is educational and does not constitute personal financial advice. It does not account for your circumstances. Consider your own situation and seek advice from a licensed adviser before acting. Read our full disclaimer.
Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
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