CGT exemption for main residence from deceased estate
The ATO has released a draft practical compliance guideline providing a safe harbour approach for beneficiaries or trustees of deceased estates seeking to claim the CGT exemption for disposal of a deceased persons’s main residence within two years of their death.
This exemption in s 118-195 of ITAA 1997 also permits the Commissioner a discretion to allow a period longer than two years to obtain the exemption.
The draft guideline also outlines the factors the Commissioner will consider when deciding if this discretion should be exercised.
The safe harbour compliance approach is intended to allow taxpayers to manage their tax affairs as if the discretion has been exercised.
“A beneficiary or legal personal representative may still qualify for the full main residence exemption when selling a home inherited from a deceased estate — despite the change in ownership.”
Factors relevant to exercise discretion
The Commissioner will generally allow a period longer than two years if the reasons for not disposing the dwelling were beyond the control of the beneficiary or trustee and such reasons existed for a significant portion of the first two years. All factors are weighed up in the context of the circumstances of the case and while the circumstances are more important than the length of delay, the amount of any potential capital gain or loss is not a relevant factor.
Safe harbour compliance approach
The draft guideline outlines the following five conditions that must be satisfied before a taxpayer can treat the discretion as being exercised:
- in the first two years, more than 12 months was spent addressing a challenge to a will or ownership of the dwelling, a life or other equitable interest delayed the disposal, complexity of the estate delayed administration or settlement of a sale contract was delayed due to circumstances outside the taxpayer’s control
- the dwelling is listed for sale as soon as practically possible after the above circumstances are resolved
- the sale is completed within six months of the dwelling being listed for sale
- no adverse factors exist eg activities undertaken to improve the sale price of the dwelling, and
- the longer period for the discretion to be exercised is not more than 12 months.
The guideline also illustrates the ATO’s preliminary approach to the safe harbour in a number of examples.
If you have questions on any of the above issues raised, please do not hesitate to contact us.
Kim Edwards
Chartered Tax Adviser
Chartered Accountant
T: 02 9984 7774
E: kime@northadvisory.com.au
About the author
Cayle Petritsch - Director & Wealth Advisor
Cayle Petritsch, Director and Wealth Advisor, works with our existing clients who have recognised the importance of business owners making strategic financial choices not only for their company, but for their personal finances too.
Cayle saw a great opportunity to expand North Advisory’s services into SMSF/superannuation, personal wealth management, asset protection services and other crucial personal finance facets that business owners need to consider.
His approach to wealth management allows you to receive highly personalised wealth advice. Working closely with Marius, Cayle understands the unique needs of every client, from their lifestyle and business goals to their retirement plans.
Key Takeaways
Death doesn’t automatically trigger CGT — inheriting a home generally doesn’t create a CGT event.
Beneficiaries receive assets at the deceased’s date-of-death cost base.
Full main residence exemption is available for inherited homes — under certain conditions.
If the yardsticks (timing, occupancy, main-residence use) are met, sale can be tax-free.
Selling within two years of inheritance often simplifies the tax outcome.
The two-year disposal rule is a “safe-harbour” that generally preserves full exemption, even if the beneficiary doesn’t live in the home.
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Frequently Asked Questions
Does inheriting a home automatically trigger Capital Gains Tax (CGT)?
No — inheriting a dwelling does not in itself trigger CGT. The change in ownership due to death is disregarded under the tax law for CGT purposes.
Under what conditions can a beneficiary claim the main residence exemption when inheriting a property?
A full exemption may apply if the dwelling was the deceased’s main residence immediately before death and either: the property is sold within two years of the death; or from the time of death until sale the property remains the main residence of a qualifying person (surviving spouse, a person with right of occupation under the will, or the beneficiary).
What if the inherited property is sold after two years — can a partial exemption apply?
Yes. If the post-death ownership period or usage doesn’t meet full-exemption conditions, a partial exemption may be available. In that case, the gain is apportioned based on “non-main residence days” during both the deceased’s and your ownership.
Does it matter when the deceased originally acquired the property (pre-CGT or post-CGT)?
Yes — if the dwelling was acquired before 20 September 1985 (pre-CGT), different rules apply. For pre-CGT dwellings, certain CGT liabilities may be disregarded — but major capital improvements after 1985 could still attract CGT on those improvements.
Are there special considerations for foreign-resident beneficiaries or when the deceased was a foreign resident?
Yes. If the inherited property was owned by a foreign resident at death — or you as beneficiary are a foreign resident and meet certain residency-duration thresholds — the main residence exemption may not apply or may be restricted.
Can I get the CGT main residence exemption on a property I inherited from a deceased estate?
Yes — I may still qualify for the CGT main residence exemption on a home I inherited from a deceased estate, but the rules are specific. To access the exemption, I generally need to meet the time and use tests set by the ATO (such as how long the deceased lived there and how long I hold the property), and I must understand how the death-related rollover provisions apply before calculating any capital gain.
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