Inherited a Property? How Capital Gains Tax Actually Works

Inheriting a property is emotionally complex enough without the added confusion of tax rules. Yet the capital gains tax implications of inherited property are among the most misunderstood areas in Australian tax law — and getting them wrong can mean a six-figure tax bill you didn't expect.

The good news is that inheriting a property is never itself a taxable event in Australia. There's no "inheritance tax" or "death duty." The CGT question only arises when you eventually sell the property. And how much (if anything) you owe depends on a handful of key factors that we'll break down clearly.

The Basic Rule: No CGT on Inheritance Itself

When a property passes from a deceased person to a beneficiary — whether through a will or intestacy — this transfer is not a CGT event. No tax is owed at the point of inheritance, regardless of the property's value or how much it has appreciated.

The CGT question only arises when the beneficiary (you) eventually disposes of the property, typically by selling it. At that point, the amount of CGT you owe (if any) depends on when the deceased originally acquired the property, how it was used, and how you use it after inheriting.

Pre-CGT Properties (Acquired Before 20 September 1985)

Capital gains tax was introduced in Australia on 20 September 1985. Properties acquired by the deceased before this date are classified as "pre-CGT assets" and receive special treatment.

If the deceased acquired the property before 20 September 1985, and it was their main residence just before they died (or was not being used to produce income), the property maintains its pre-CGT status when inherited. This means the cost base for CGT purposes is the market value of the property at the date of the deceased's death.

When you eventually sell, you're only taxed on the capital gain that occurs from the date of death to the date of sale — not on the entire appreciation since the property was originally purchased decades ago.

Post-CGT Properties

If the deceased acquired the property on or after 20 September 1985, the cost base you inherit is the original cost base of the deceased — essentially what they paid for it, plus any capital improvements they made. When you sell, the capital gain is calculated from that original purchase price, not from the date you inherited it.

This can result in a significantly larger taxable gain, especially for properties held for decades. A property purchased for $200,000 in 1990 and sold for $1.2 million today would generate a $1 million capital gain (less any capital improvement costs), even though you only inherited it recently.

The Main Residence Exemption

The main residence exemption can potentially eliminate or reduce the CGT liability on an inherited property. But the rules are specific and depend on how the property was used.

Multi-Generational Inheritance

Properties that pass through multiple generations — grandparent to parent to grandchild — add another layer of complexity. The pre-CGT status and cost base rules carry through each transfer, but the usage of the property between each death is critical.

For example, if grandparents bought a property in 1960 (pre-CGT), it was inherited by their son in 2000, and the son rented it out rather than living in it, the pre-CGT exemption becomes more complicated. The cost base may reset to market value at the date of the first death, and any gain from that point forward — including during the rental period — may be taxable when the grandson eventually sells.

What If the Property Was Rented Out?

This is where most of the complexity lies. If the inherited property was used as a rental at any point after the deceased's death, you'll likely need to apportion the capital gain between the exempt period (when it qualified as a main residence) and the taxable period (when it was rented or not qualifying as a main residence).

The ATO requires careful record-keeping for this calculation: the market value at the date of death, the market value at the date the property's use changed (e.g., when it started being rented), and the eventual sale price. Getting a professional valuation at key dates can save significant headaches and money later.

The Two-Year Disposal Rule

If the inherited property was the deceased's main residence just before death, the beneficiary has 2 years from the date of death to sell the property and still claim the full main residence exemption — even if the beneficiary never lives in the property themselves.

This 2-year window is one of the most valuable tax concessions available on inherited property. If you're considering selling, timing the sale within this window can save tens or even hundreds of thousands of dollars in CGT. After 2 years, the exemption starts to be apportioned based on the property's subsequent use.

If you're deciding whether to sell or hold an inherited property, understanding the suburb's growth potential is essential. A property in a high-growth suburb might be worth holding despite the tax complexity, while one in a stagnating area might be better sold within the 2-year window.