Death and Taxes : Understanding the Tax Implications of Inheriting Property
One Certainty in Life: Death. But Taxes? Maybe There’s Some Flexibility.
When a loved one passes away, dealing with their estate can be overwhelming—not just emotionally but financially as well. One of the biggest concerns is what happens to capital gains tax (CGT) when inheriting property. The good news? There are special tax rules that may reduce or even eliminate the tax you have to pay.
Do You Pay Tax When You Inherit Property?
No. There’s no inheritance tax in Australia. However, if you later sell or rent out the inherited property, capital gains tax (CGT) may apply. Whether you pay tax depends on:
- When the deceased acquired the property.
- Whether they used it as their main residence.
- How long you hold onto it before selling.
The Main Residence Exemption – When You Can Sell Tax-Free
In some cases, you can sell the inherited property without paying CGT under the main residence exemption.
You qualify if: ✅ The deceased purchased the property before 20 September 1985 (pre-CGT era). In this case, you won’t pay CGT at all when you sell. ✅ The property was the deceased’s main residence at the time of their death and not used to produce income (i.e., not rented out). ✅ You sell the property within two years of inheriting it.
The two-year rule gives executors and beneficiaries time to sell without worrying about tax. However, extensions may apply if circumstances delay the sale (e.g., legal disputes over the estate).
What If You Keep the Property or Rent It Out?
If you hold onto the property and later sell it, CGT will apply based on the increase in value from the time of death (not from when the deceased originally purchased it).
Example:
- You inherit a property valued at $800,000 on the date of the owner’s death.
- You rent it out for two years, then sell it for $1 million.
- Your capital gain = $200,000 ($1 million – $800,000).
- Since you held the property for more than 12 months, you qualify for the 50% CGT discount.
- Your taxable capital gain = $100,000, which is added to your taxable income.
Renting Out the Property Before Selling – How CGT is Calculated
If you rent out the property before selling, part of the gain may still be tax-free if the property was the deceased’s main residence.
Example: Beneficiary Rents the Property for 2 Years Before Selling
- You inherit a house worth $600,000 at the date of death.
- You rent it out for 2 years before deciding to sell.
- When you sell, the property is worth $900,000.
- Capital gain = $300,000.
- Since you rented it out, some CGT applies (but not for the period before the deceased’s passing).
- You qualify for the 50% CGT discount, reducing the taxable gain to $150,000.
- The amount added to your taxable income depends on your marginal tax rate.
Selling After Two Years – What If You Miss the CGT Exemption Deadline?
If you don’t sell within two years, the exemption may not fully apply—but there are still ways to reduce tax:
- Partial CGT Exemption: If the deceased’s home was their main residence, you only pay CGT from the date you inherited it, not from when they bought it.
- Cost Base Reset: The property’s cost base is the market value at the date of death, reducing your taxable gain.
- 50% CGT Discount: If you own the property for more than 12 months before selling, you get a 50% discounton the capital gain.
Special Considerations: Deceased Estates & Tax Planning
✅ Inherited Properties & Superannuation: If a property is transferred from a deceased estate linked to a super fund, different tax rules apply. ✅ Capital Losses Can Offset Gains: If you inherit other assets (e.g., shares) that have dropped in value, losses may help offset CGT. ✅ Living in the Property Before Selling: Moving into the inherited home before selling can change CGT outcomes, particularly if you later establish it as your main residence.
Need Help Navigating the Tax Implications?
Every estate is different, and understanding CGT on inherited property can save you thousands. If you’re dealing with an inherited home and wondering how best to manage the tax impact, let’s chat. I can help you structure the sale, rental, or transfer to ensure the best possible outcome.
