No inheritance tax, but CGT: selling an inherited home within 2 years and other worked examples

Australia has no inheritance tax or estate duty. The death itself is generally not a capital gains tax event: under Division 128 of the Income Tax Assessment Act 1997, assets pass to the executor and then to beneficiaries without CGT at that point. But when a beneficiary later sells an inherited asset, CGT can apply. For a dwelling that was the deceased's main residence, section 118-195 disregards the whole gain if, among other conditions, the beneficiary's ownership interest ends within 2 years of the death (or a longer period the Commissioner allows), and the deceased was not an excluded foreign resident just before death. Miss the window and part of the gain can become taxable.

This guide explains the main rules with illustrative examples. It is general information, not tax advice; check the ATO's deceased estate guidance or a tax agent.

The basic rule: you inherit the cost base

Keep the deceased's purchase records and a valuation at the date of death. Executors should obtain a valuation for property and record share prices at death, because beneficiaries will need them years later.

The 2-year rule for an inherited dwelling (s 118-195)

The gain is fully disregarded if the deceased was not an excluded foreign resident just before death, and one item from each column is satisfied:

"Ownership interest ends" generally means settlement of the sale, not the contract date. The ATO has published guidance on when it will allow more than 2 years, for example where the will is challenged, the estate is complex, or settlement is delayed by factors outside the executor's control. Ask the ATO before relying on an extension.

Worked example 1: sold within 2 years (illustrative)

Joan bought her Adelaide house in 2001 for $280,000 and lived in it until she died on 15 March 2026. It was worth $910,000 at her death. Her executor sells it, with settlement on 20 January 2027 for $940,000.

• Settlement is within 2 years of death.
• It was Joan's main residence just before death and not used to produce income.
• CGT: nil. The $30,000 rise after death is also disregarded.

Worked example 2: kept and rented out (illustrative)

Same house, but her daughter Kim keeps it and rents it out from July 2026, then sells in 2031 for $1,150,000.

• Settlement is more than 2 years after death and Kim never lived there, so the full exemption does not apply.
• Because the house was Joan's main residence just before death, Kim's first element of cost base is the market value at death: $910,000.
• The rental period also makes the property an income-producing asset. Kim's capital gain is broadly $1,150,000 − $910,000 − selling costs and other cost base items. If selling costs and other items are $30,000, the gain is $210,000.
• If Kim held it for at least 12 months (the holding period for an inherited asset includes the deceased's ownership for this purpose in many cases), the 50% CGT discount applies to an Australian resident individual: $105,000 is added to her taxable income.

A partial exemption may apply in some mixed cases, calculated by days. A tax agent should do the calculation.

Worked example 3: pre-CGT shares (illustrative)

Ray inherited shares his father bought in 1983. Their market value at the date of death in 2025 was $48,000. Ray sells them in 2027 for $60,000.

• Pre-CGT asset, so Ray's cost base is the market value at death: $48,000.
• Gain: $12,000; held more than 12 months; with the 50% discount, $6,000 is assessable.

Foreign residents and the main residence exemption

The main residence exemption is restricted for foreign residents. Section 118-195 is not available if the deceased was an excluded foreign resident just before death, and beneficiaries who are foreign residents when they sell may also lose the exemption. The rules changed from 2017 and have transitional provisions. Families with members overseas should get advice before choosing which beneficiary takes the property.

Other inherited assets

• Shares and managed funds: the cost base rules above apply; keep records of dividend reinvestments.
• Collectables and personal use assets: special CGT rules and thresholds apply.
• Assets left to a tax-advantaged entity or a foreign resident: death itself can trigger CGT (CGT event K3) in the deceased's final return. Ask a tax adviser.
• Super: not a CGT matter; see super death benefit tax.

Executor's checklist for CGT

1. Obtain a valuation of every property at the date of death.
2. Find the deceased's purchase contract and improvement records.
3. Note whether the home was ever rented or used for business.
4. Diarise 2 years from the date of death for any main residence.
5. Lodge the deceased's date of death return and any estate trust returns.
6. Record which beneficiary takes each asset and their residency.

The interactive documents checklist includes the 2-year diary item, and the estate planning and separation checklist covers the whole process.

FAQ

Is there stamp duty when property passes to a beneficiary?

Transfers from an estate to a beneficiary under a will are generally exempt from or subject to concessional transfer duty in each state, but conditions apply. Check your state revenue office.

What if the executor sells and distributes cash?

The same 2-year rule applies to the trustee of the estate. If the executor sells within 2 years, the gain is disregarded in the estate.

Does living in the inherited house help?

Yes. If you move in and it becomes your main residence from death until you sell, you may get the full exemption without the 2-year limit, subject to the column 2 conditions.

What counts as the date of death for the 2 years?

The actual date of death, not the date of the grant.

Sources

• Federal Register of Legislation — Income Tax Assessment Act 1997, Division 128 and section 118-195
• Australian Taxation Office — deceased estates, inherited dwellings and the 2-year period
• Revenue NSW — duty on transfers from deceased estates (each state has its own revenue office)
• Related: probate fees, estate mistakes