Special rules may apply to disregard a capital gain or loss a taxpayer makes in relation to a main residence acquired from a deceased estate.
These rules apply where:
- the taxpayer is an individual, and
- the ownership interest of the main residence passed to the taxpayer as a beneficiary in, or the taxpayer owned it as the trustee of, a deceased estate.
A taxpayer who acquires a dwelling as a surviving joint tenant is treated as having acquired the dwelling as beneficiary of a deceased estate. Joint tenancy involves two (or more) people who have an equal share in the ownership of an asset. Where one owner dies, the remaining owner (or owner’s) have right of survivorship, with the deceased’s interest in the property passing to the surviving owner(s).
Full exemption for dwellings acquired by the deceased prior to 20 September 1985
A full exemption is available if the dwelling was acquired by the deceased prior to 20 September 1985 (pre-CGT) and the taxpayer’s ownership interest1 ceased within two years' of the deceased's death.
The Commissioner of Taxation (Commissioner) has discretion to extend the two-year period and will generally allow a longer period where the property could not be sold and settled within two years due to reasons beyond the control of the seller for a significant portion of that timeframe. Practical Compliance Guideline (PCG) 2019/5 outlines when the Commissioner might exercise this discretion and then the taxpayer can apply the CGT exemption without applying to the Commissioner for this discretion.
If the dwelling was not disposed of within two years, a full exemption may still be available if the dwelling was the main residence of either:
- the individual the ownership interest passed to as beneficiary of a deceased estate (ie the taxpayer)
- the deceased’s spouse
- an individual with occupancy rights under the deceased’s will from the time of the deceased’s death until the taxpayer disposes of it.
Example
Peter bought a home prior to 20 September 1985. When Peter died in February 2015 the home was passed to his beneficiary, Bill.
Under Peter's will, Pauline had a right to occupy the home which she used as her main residence from the time of Peter's death until Bill disposed of it in March 2022. Pauline did not have an ownership interest in any other dwelling. As such the dwelling is treated as her main residence during this period.
Bill will be entitled to a full exemption.
Full exemption for dwellings acquired by the deceased on or after 20 September 1985
In addition to the requirements for pre-CGT assets, stricter tests apply for dwellings acquired by the deceased on or after 20 September 1985 (post-CGT).
For dwellings acquired by the beneficiary or trustee on or before 20 August 1996, there are additional requirements for a full exemption. The deceased must:
- have used the dwelling as their main residence from the date they acquired it until their death; and
- not used it to produce income.
For dwellings acquired by the beneficiary or trustee after 20 August 1996, at the time just before the deceased’s death, the property must:
- have been the deceased’s main residence, and
- not have been used at this time for producing assessable income
Example
Roger was the sole occupant of a home he bought in April 2010. He did not live in or own another home.
He died in January 2021 and left the house to his son, James, who rented out the house and then disposed of it 15 months after his father died.
James is entitled to a full exemption as he acquired the house after 20 August 1996 and disposed of it within two years of his father’s death.
Partial exemption
If a taxpayer does not qualify for a full exemption, they may still be entitled to a partial exemption.
In such a case, the capital gain or loss is apportioned by working out the number of 'non-main residence days' as compared to 'total ownership days'.
Non-main residence days
Broadly, for a pre-CGT dwelling, this is the number of days from the death of the deceased until the taxpayer sells the dwelling, when the dwelling was not the main residence. For a post-CGT dwelling, this period is extended by the number of days during the deceased’s ownership period when the dwelling was not their main residence.
Total ownership days
Broadly, for a pre-CGT dwelling, this is the number of days from the deceased’s death until the day the taxpayer sells the dwelling. For a post-CGT dwelling, this is the number of days from when the deceased acquired the dwelling until the taxpayer disposes of it.
Example
Vanessa bought a house on 12 February 2007 which she used solely as a rental property. When she died on 17 November 2010, the house became the main residence of her beneficiary, Lisa, who sold the property on 27 November 2022.
As Vanessa had never used the property as her main residence, Lisa cannot claim the full exemption. However, as Lisa used the house as her main residence, she is entitled to a partial exemption.
Vanessa owned the house for 1,375 days. Since she did not treat the home as her main residence for this entire period, it will form the ‘non-main residence days’.
The total ownership for both Vanessa and Lisa is a period of 5,768 days (1,375 + 4,394).
Assuming Lisa made a capital gain of $500,000, the taxable portion is calculated as follows:
Note that the apportionment formula may be adjusted where a dwelling is inherited from someone who had previously acquired the dwelling by inheritance.