How to Avoid Paying Capital Gains Tax on Inherited Property in Australia
Inheriting a property can be both a blessing and a challenge. While it is often a valuable asset, navigating the tax implications — especially Capital Gains Tax (CGT) — can be complex. In Australia, CGT may apply when you sell an inherited property, depending on several factors including when the property was originally acquired, how it was used, and how quickly it is sold after the owner's death.
At Trinity Accounting Practice, we guide clients through every step of this process to help them understand their obligations and explore legitimate ways to minimise or avoid CGT on inherited property.
Understanding CGT on Inherited Property
Capital Gains Tax is not a separate tax — it forms part of your income tax. A capital gain arises when you sell an asset for more than its cost base. For inherited property, CGT does not apply when you inherit the property. It may apply when you eventually sell the property, depending on the conditions outlined below.
Key Definitions
The cost base is the original purchase price of the property plus eligible costs such as stamp duty, legal fees, and capital improvements. The market value substitution rule applies when cost base records are not available — typically the market value of the property at the date of the deceased's death is used instead. The 50 per cent CGT discount may apply if the property was held for more than 12 months before sale (for individual taxpayers).
When Does CGT Apply to Inherited Property?
CGT may apply if you sell the inherited property and make a profit, the property was not the deceased's main residence at the time of death, you rent out or use the property to produce income before selling, or you sell the property more than two years after the date of death without meeting specific exemption criteria.
You may avoid CGT entirely if the deceased acquired the property before 20 September 1985 (making it a pre-CGT asset) and you sell it within two years while meeting certain conditions, if the property was the deceased's main residence and was not used to produce income, or if you sell the property within two years of the date of death and the property qualifies for the main residence exemption.
Key CGT Exemptions
The Two-Year Rule (Main Residence Exemption)
You may be fully exempt from CGT if the deceased acquired the property after 20 September 1985, the property was their main residence at the time of death, the property was not used to produce income (for example, it was not rented out), and you sell the property within two years of the date of death.
If the property cannot be sold within two years due to legal delays, probate complications, or family disputes, you can apply to the ATO for an extension of the two-year period. The ATO will consider whether the delay was beyond your control and whether you took reasonable steps to sell within the original timeframe.
Pre-CGT Assets (Acquired Before 20 September 1985)
If the deceased acquired the property before 20 September 1985, the property is known as a pre-CGT asset. If you sell it within two years of the date of death and it was the deceased's main residence and was not used to produce income, no CGT applies. If you hold the property for longer than two years, the cost base is generally the market value of the property at the date of the deceased's death.
Partial Main Residence Exemption
If the property was used partly to produce income — for example, a room was rented out or the entire property was rented for a period — you may qualify for a partial exemption. CGT will apply proportionally based on the period and extent of income-producing use relative to the total period of ownership.
Calculating CGT on Inherited Property
If CGT does apply, the capital gain is calculated as the sale price minus the cost base. The cost base depends on when the property was originally acquired. For pre-CGT properties, the cost base is generally the market value at the date of death. For post-CGT properties (acquired after 20 September 1985), the cost base is the deceased's original purchase price plus stamp duty, legal fees, and any capital improvements made by the deceased or the estate.
Additional factors that affect the calculation include selling costs such as real estate agent commissions and legal fees (these are deducted from the sale price or added to the cost base), capital improvements made by the beneficiary after inheriting the property, and the ownership percentage for jointly inherited property where multiple beneficiaries share the asset.
If the property was held for more than 12 months before sale, individual taxpayers may be eligible for the 50 per cent CGT discount, which halves the taxable capital gain. This discount is not available to companies.
Strategies to Minimise or Avoid CGT
Sell Within the Two-Year Window
If the property qualifies for the main residence exemption, selling within two years of the date of death provides a full CGT exemption. We can help you plan and coordinate the sale timeline and work with your solicitor to manage estate administration efficiently.
Move Into the Property as Your Main Residence
If you move into the inherited property and make it your main residence, you may extend the CGT exemption beyond the two-year period. This applies if you genuinely occupy the property as your home and sell while it is still your main residence.
Apply for an ATO Extension
If delays were beyond your control — such as family disputes, probate complications, or legal proceedings — you can apply to the ATO for a private ruling extending the two-year period. We prepare these applications and provide the supporting documentation the ATO requires.
Claim All Eligible Cost Base Additions
Ensuring the cost base is as accurate and complete as possible reduces the taxable capital gain. We verify that the cost base includes all legal and conveyancing costs from the original purchase, stamp duty paid at acquisition, capital improvements made by the deceased, the estate, or the beneficiary (such as renovations, extensions, and landscaping), and any holding costs that may be included in the cost base in certain circumstances.
Time the Sale Strategically
If CGT is unavoidable, the timing of the sale can affect the tax outcome. Selling in a financial year where your other income is lower will result in a lower marginal tax rate being applied to the capital gain. We can model different scenarios to help you choose the most tax-effective timing.
Record-Keeping for Inherited Property
Good records are essential to support your CGT calculations and any exemption claims. We help clients obtain and maintain probate documents and grant of representation, an independent market valuation at the date of death, records of the original purchase price and associated costs (if available), evidence of any capital improvements made by the deceased or the beneficiary, and ownership records and title documentation.
Records must be kept for at least five years after the CGT event (the sale of the property). If you are holding the property for an extended period, keep all records for the entire duration of ownership.
Common Mistakes to Avoid
The most frequent errors include waiting too long and missing the two-year exemption window without applying for an extension, renting out the property before selling it (which can disqualify the main residence exemption), failing to obtain a professional market valuation at the date of death, underestimating the impact of capital improvements on the cost base, and selling without understanding which exemptions may apply to your specific circumstances.
Get Expert Advice on Inherited Property CGT
The CGT rules on inherited property are detailed and the financial stakes can be significant. With the right advice and planning, it is often possible to significantly reduce or entirely eliminate the CGT liability on an inherited property.
At Trinity Accounting Practice, we work with beneficiaries, executors, and families across Sydney and Australia. From calculating the exact CGT liability and applying the 50 per cent discount, through to preparing ATO ruling requests and structuring the sale for the best tax outcome, we provide practical, expert guidance at every stage.
Trinity Accounting Practice
Accounting Firm in Beverly Hills, Sydney
Phone: 02 9543 6804
Address: 159 Stoney Creek Road, Beverly Hills NSW 2209
Website: www.trinitygroup.com.au
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Disclaimer: Information provided on this website is intended as a general overview only and does not replace professional advice tailored to your personal circumstances.
