Capital Gains Tax and Inherited Property

Capital Gains Tax and Inherited Property

For most of us, conversations surrounding Capital Gains Tax (or “CGT”) can be boring, stressful and confusing. These feelings can be amplified when trying to cope with the death of a loved one. Thankfully, worrying about CGT on the sale of inherited property does not need to be an added stress at this difficult time.

This article will set out the basics of Capital Gains Tax and inherited property and is to be treated as a guide only. As always, we recommend that you speak with our friendly team to obtain legal advice regarding your particular circumstances.

What is CGT?

CGT is a tax imposed by the Australian Taxation Office in relation to disposal (sale) of an asset. An asset includes real property, such as a house, unit or townhouse. When real property is sold, the capital gain (profit) must be declared by the seller on an income tax statement. This is because CGT is a separate tax to that of your income or other taxes.

Inheriting a Property when a Partner Dies

If you own a property with your partner and they pass away, their interest in the property is transferred depending on how you owned the property together.

Most couples own property as joint tenants. Joint tenants share their interest in the property as a form of co-ownership. When one joint tenant dies, their interest automatically passes to the surviving joint tenant.  However, it is important to let the Queensland Titles Office know to record the death so that the surviving joint tenant is recorded as the sole owner of the property. The team at Miller Sockhill Lawyers are happy to assist with this.

If the property is owned as tenants in common, then each partner’s share in the property is a separate interest. The deceased partner’s share in the property will form part of the deceased estate and can be transferred to a beneficiary in the will of the deceased. If your partner dies and there is no will in place, see our article about  What happens if I die without a will? or if your partner has left a will and has not provided for you under their will, see our article about contesting a will.

In either of these cases, no CGT is payable on the transfer of inherited property.

Payment of CGT when Selling Inherited Property

There are several CGT exemptions available to individuals who are selling inherited property. These can be full exemptions or partial exemptions. In determining which exemption may apply to your circumstance, you may also need to take into consideration strict rules surrounding those exemptions.

Example of Capital Gains Tax and Inherited Property

It may be useful to provide the following example:

Anna is an Australian citizen and the sole owner of her Peregian Beach house (“the Property”) which she purchased in 1999, has lived in for over 23 years and has not received any income from it.

In her will, Anna has left the Property to her son, Bradley.

Anna passes away in 2022 and her will comes into effect with Bradley as her beneficiary.

The Property is now inherited by Bradley who has a right to occupy the Property under Anna’s will.

By continuing with this example, we can apply the following scenarios and discuss how CGT exemptions may apply to Bradley. Note that the following scenarios would be different if Anna had not used the Property as her main residence or if she used it to produce income through renting it our or conducting a business from it.

Scenario 1: Bradley decides to sell the Property

Anna used the Property as her main residence and did not receive any income from it, Bradley can claim a full exemption from payment of CGT provided that Bradley sells the property within two years. Settlement of the sale must take place on or before two years from the date of Anna’s death for the exemption to apply.

In this scenario, a full exemption can be claimed under the main residence exemption. This exemption can be claimed as Anna used the Property as her main residence just before the date of her death.

Scenario 2: Bradley decides to live at the Property, then later sells it

In this scenario, Bradley can claim the main residence exemption. Bradley, as a beneficiary, has a right to occupy the Property under Anna’s will. If Bradley moves into the Property and uses it as his main residence, then no CGT will be payable on the sale of the Property regardless of when Bradley decides to sell.

Scenario 3: Bradley decides to rent the Property, then later sells it

Bradley may be entitled to a full exemption from CGT if he rents out the Property, so long as he sells it within two years of Anna’s death.

If Bradly does not sell the Property within this time, then he may only be eligible for a partial exemption. In order to calculate the taxable portion of the capital gain or loss, Bradley must:

  1. Calculate the capital gain or loss from selling the property.
  2. Determine the number of non-main residence days.
  3. Determine the number of total days Anna acquired the property until Bradley sold it.

These figures can then be substituted into the following formula:

Capital gain or loss x non-main residence days ÷ total days = capital gain or loss.

The capital gain or loss will need to be reported on Bradley’s income statement.

Key Points to Takeaway

  • CGT is complex and requires expert advice in order to avoid costly and stressful audits by the ATO.
  • How property is owned and used determines how CGT exemptions are applied to the sale of a property.
  • For peace of mind, it is essential to have a will in place regarding any property you wish to bequeath. This is particularly important if you are the sole owner of a property.

If you have any questions surrounding CGT or bequeathing a property in your will, contact our expert team on 07 5444 4750.


Sunshine Coast Lawyers