Capital gains tax on inherited property

Two tests, and you need one from each

An inherited home is often fully exempt, but only if two separate tests are both met: one about the person who died, one about what happens after. The calculator above takes the dates and shows whether yours is, the cost base you take over, and the taxable share if it is not, counted in days as the Act counts them.

Section 118-195 sets out the exemption as a table with two columns, and a dwelling is exempt if at least one item in each column is met. The first column is about the person who died, the second about what happens after.

One condition sits over both columns: the deceased must not have been an excluded foreign resident, meaning a foreign resident for more than six continuous years, just before they died. If they were, there is no full exemption, every day they owned it counts against it, and the market-value cost base for their home goes too. Days after the death when it was the home of their spouse, a will occupant or the beneficiary who sells still count in its favour. A home they bought before 20 September 1985 keeps its value at death as the cost base, and its count starts at the death.

The two years

The two years run to the second anniversary of the death, and the date that has to fall inside them is settlement, when your ownership ends. A contract signed in time that settles a week late is outside. The ATO is explicit that what you do with the house in those two years does not matter: you can live in it, leave it empty or rent it out and keep the full exemption.

If the estate is held up, the Commissioner can allow longer. The ATO’s guideline PCG 2019/5 sets out when you can treat that as allowed without asking, and since 1 April 2026 anything outside it is a written request to the ATO, which usually decides after the sale has settled.

The cost base you take over

You are treated as acquiring the property on the day of death. If it was the deceased’s home just before they died and not earning income, or if they bought it before 20 September 1985, your cost base is its market value on that day, which wipes out every dollar of growth while they owned it. Otherwise you take over their cost base: what they paid plus their costs. Costs the executor paid are added to either. A surviving joint tenant is different again: for a post-1985 home they take a share of the deceased’s own cost base.

When it is only partly exempt

Miss the two tests and section 118-200 apportions the gain by days: the days it was not anyone’s qualifying home, over the total days. For a post-1985 dwelling the total runs from the day the deceased bought it, even though the gain itself may only run from the death. That is the quirk worth seeing in numbers, and it is why a house left empty for three years after the death can still be mostly exempt.

The ATO’s examples, through this calculator

Renting it out after the death

Inside the two years, renting changes nothing. Past them, it does two things. The full exemption is gone, and because the home was exempt just before it was first rented, the law treats you as buying it again that day at its market value. The ATO’s words are “You don’t have a choice.” Every day from then counts against the exemption, so the gain from that value onward is taxable. The calculator assumes the renting starts at the death, which makes that value the value at death; if the first tenant came later, the value on that day replaces it.

The rental loss is affected too, from the 2027–28 year. A beneficiary acquires on the day of death, so a home inherited from a death after Budget night, 12 May 2026, is on our reading inside the new limit on rental losses unless it counts as new. The Tax Reform No. 2 Act passes the old rules only to a surviving spouse and to a co-owner who also bought before Budget night. The 2027 changes page has the sections.

If it was inherited more than once

A house that passed from a grandparent to a parent and then to you is apportioned across the whole chain under section 118-205, counting the days it was the home of each owner who died, their spouse, a will occupant or a beneficiary. The ATO’s example has 3,350 of 7,050 days counting against a $400,000 gain, $190,071 taxable. The calculator does not take a chain; it treats the last person who died as the first owner.

What changes on 1 July 2027

The exemption rules do not change: the 2026 reform Acts leave sections 118-195 to 118-210 and the cost base rules alone. What changes is the tax on any taxable part. For an individual’s CGT event from 1 July 2027 — for a sale, normally the contract date — the 50% discount is replaced by indexation and a 30% minimum rate, an asset held on 30 June 2027 is treated as sold and bought back that day, and a pre-CGT asset stops being pre-CGT. How that deemed sale meets an inherited home, and above all a pre-1985 one, has not been settled: Treasury’s draft said deceased estates would be dealt with in a future tranche. That is why the calculator stops at sales settling by 30 June 2027; a contract signed before 1 July 2027 that settles later may still use today’s rules.

Selling a home you inherited and lived in yourself is a different question, covered by the six-year rule if you then moved out and rented it, and by the capital gains tax calculator for the tax on the taxable part.