Inherited Property and the Two-Year Rule

When an inherited home is sold, the first question for capital gains tax is often whether the sale is exempt at all. A special rule covers homes from deceased estates, and timing is a big part of it. This guide explains the two-year rule in general terms, how extensions work, and when a value at the date of death matters.

What is the two-year rule?

Section 118-195 of the Income Tax Assessment Act 1997 lets a beneficiary, or the trustee of the deceased estate, disregard a capital gain or loss on an inherited home when two sets of conditions are met.

First, one of these is true:

• the person who died acquired the home before 20 September 1985, or
• they acquired it on or after that date, it was their main residence just before they died, and it was not then being used to produce income.

Second, one of these is true:

• The sale settles within two years of the death. The ATO says you meet this if you dispose of the property under a contract that settles within two years. It does not matter whether the home was lived in or rented out during those two years.
• It stayed someone’s home. The ATO says that, from the death until the sale, the property is not used to produce income and is the main residence of the deceased’s spouse (unless they were permanently separated), a person with a right to occupy it under the will, or the beneficiary who sells it.

Conditions and exceptions apply. The ATO says the home and its land must be sold together, and that if you or the person who died was a foreign resident, you are generally not entitled to the main residence exemption. Your accountant decides whether the rule applies.

Do the two years run to the contract or to settlement?

To settlement. For most capital gains tax purposes a sale happens when the contract is made, but for this rule the ATO says the contract must settle within two years of the death. Allow time for settlement when you plan a sale. See contract or settlement date.

Can the two years be extended?

Yes, in some cases. The ATO says the two-year limit is extended if the sale is delayed by exceptional circumstances outside your control. Under its guideline PCG 2019/5, an extension of up to 18 months applies automatically when all of a set of conditions are met. They include more than 12 months of the first two years being spent dealing with something like a challenge to the will, a life interest, a complex estate or a delayed settlement, and the sale settling within 12 months of the property being listed.

The automatic extension is ruled out if delays such as waiting for the market to pick up, or refurbishing the home to improve the price, contributed materially. If the conditions are not all met, you can ask the ATO for an extension, which it grants only for exceptional circumstances outside your control.

The ATO says you do not need an extension if an eligible person lived in the home as their main residence from the death until the sale, or if there is no capital gain.

When does a date of death value matter?

If the sale is fully exempt, there may be no gain to work out. A value at the date of death can still matter:

• If the sale is not fully exempt. For example, it settles after two years with no extension and nobody eligible lived there. Part of the gain may then be taxable. If the home was the deceased’s main residence just before they died and was not being used to earn income, or they acquired it before 20 September 1985, its market value on the date of death generally becomes the beneficiary’s cost base (section 128-15).
• While the outcome is uncertain. The ATO suggests that, until you are sure of the circumstances, you keep a record of the market value of the home at the time the person died, and get a copy of any valuation report the executor or trustee has.
• For the estate itself. An executor may want a value at the date of death for the estate’s records, or to help share the estate fairly. See inherited property.
• If the home is kept past 30 June 2027. That date may matter as well under the new capital gains tax rules that start on 1 July 2027: see 30 June 2027.

What if the sale is only partly exempt?

The taxable share is worked out by days, broadly the days the home was not the main residence of an eligible person compared with the total days, counted to settlement of the sale. The ATO’s page on partial exemptions for inherited property sets out the steps, and your accountant does the calculation.

Valuing at the date of death

A date of death valuation values the home as it was on that day, using sales from around then, whenever the report is prepared. Changes since, such as repairs or a renovation before a sale, are left out. If the home has already been sold, the later sale price is considered with care, because it reflects a later market and sometimes a changed property.

The Desktop CGT Valuation is $149 and the Inspected CGT Valuation is $495, both including GST. Executors, administrators and beneficiaries can request a valuation, and the glossary explains terms such as legal personal representative.