No tax is payable in Australia when a home passes from a deceased person to their executor or beneficiary, but capital gains tax (CGT) can arise when the home is later sold. The sale is fully exempt if the deceased bought the home before 20 September 1985, or it was their main residence just before death and not then rented out, and in addition the sale settles within two years of the death or a qualifying person lives in the home until it is sold. If these conditions are not met, or the deceased was a long-term foreign resident, part or all of the gain may be taxable.
Why death itself does not trigger CGT
Division 128 of the Income Tax Assessment Act 1997 (Cth) disregards any capital gain or loss when a person dies and an asset passes to their executor or administrator, or from the estate to a beneficiary. The executor or beneficiary is treated as acquiring the asset on the date of death. The tax is deferred, not removed: the question is what happens when the executor or beneficiary later sells. For homes, the answer is mainly in section 118-195, often called the “two-year rule”. The wider picture is covered in No Inheritance Tax in Australia? Capital Gains on Death, Foreign Beneficiaries and Gifts from Overseas.
The two-year rule: how a full exemption works
Section 118-195 fully exempts an individual beneficiary, or the trustee of a deceased estate, on the sale of a dwelling and its land if one condition from each column is met and the deceased was not an “excluded foreign resident” just before death.
| Step 1: the deceased’s ownership (one of) | Step 2: after the death (one of) |
|---|
| The deceased acquired the dwelling before 20 September 1985 (“pre-CGT”) | Ownership ends within two years of the death, or a longer period allowed by the Commissioner |
| The deceased acquired it on or after 20 September 1985, it was their main residence just before death, and it was not then used to produce income | From the death until the sale, it was the main residence of the deceased’s spouse (not permanently separated), a person with a right to occupy it under the Will, or the beneficiary who sells it |
Under the two-year route, use of the property during the two years does not matter. It can be left empty, occupied by family, or rented out.
Two years is measured to settlement
The ATO’s position is that the contract must settle within two years of the date of death. Signing within two years is not enough if settlement falls after the anniversary.
The occupation route and “right to occupy”
If a surviving spouse or a beneficiary lives in the home from the death until the sale, there is no time limit. The ATO accepts that someone who moves in as soon as practicable, for example once probate is granted, is treated as living there from the date of death.
In draft Taxation Determination TD 2026/D1, the ATO takes a narrow view of “a right to occupy under the deceased’s Will”: the right must arise under the Will’s own terms. Informal family arrangements, an executor’s discretion to let someone stay and, on the draft view, rights granted under a testamentary trust may not qualify. The Law Council of Australia has objected to the testamentary trust distinction, and the draft had not been finalised at the time of writing. See also Beneficiaries in Occupation of Estate Property.
Extending the two years: PCG 2019/5
The Commissioner may allow a longer period, but only for exceptional circumstances outside the control of the executor or beneficiary. Practical Compliance Guideline PCG 2019/5 provides a safe harbour, with no application needed, if all of these are met:
- more than 12 months of the first two years was spent dealing with a challenge to the Will or to ownership, a life interest or right of occupancy delaying the sale, the complexity of the estate, a sale delayed or fallen through for reasons outside the seller’s control, or government COVID-19 restrictions;
- the property was listed as soon as practically possible after those matters were resolved, and the sale was actively managed;
- settlement occurred within 12 months of listing;
- waiting for the market to improve, renovating to raise the price, inconvenience, or unexplained executor inactivity did not materially contribute to the delay; and
- the extension needed is no more than 18 months.
Otherwise, the executor or beneficiary may ask the ATO to exercise its discretion, usually after settlement, with evidence of the timeline. A family provision claim or a dispute between siblings may support a request; holding out for a better price will not.
Partial exemption when the rule is not met
Under section 118-200, the gain is multiplied by the “non-main residence days” and divided by the “total days”. Non-main residence days include days after the death when the home was not a qualifying person’s main residence, and days in the deceased’s ownership when it was not their main residence (ignored for a pre-CGT dwelling, or where it was the deceased’s main residence just before death and not producing income). The count becomes technical where the deceased bought after 1985, rented it out at some stage, or inherited it themselves, so a tax adviser should run it on the actual dates.
Cost base
- Market value at death applies if the deceased acquired the dwelling before 20 September 1985, or if it passed to the beneficiary after 20 August 1996 and was the deceased’s main residence just before death and not producing income.
- The deceased’s cost base generally applies otherwise, for example to a post-1985 investment property.
- Costs the executor incurs, such as conveyancing on transfer to the beneficiary, and some administration legal costs, can generally be added.
A date-of-death valuation is worth obtaining even when a quick sale is planned. Plans change, and a retrospective valuation is harder to support.
The six-year absence rule and rented periods
If a parent moved into aged care and chose to keep treating the home as their main residence, that status can continue indefinitely if the home was not rented, or for up to six years if it was. The ATO’s guidance confirms that a home rented for less than six years after the owner moved into a nursing home can still be treated as the main residence at death, so the two-year rule remains available. Renting the home after the death is irrelevant under the two-year route, but defeats the occupation route.
Foreign residents
Since transitional relief ended on 30 June 2020, foreign residents generally cannot use the main residence exemption.
The deceased
The exemption is unavailable if the deceased was an “excluded foreign resident” just before death: broadly, a foreign resident for more than six continuous years, or for six years or less without a qualifying life event (such as a terminal medical condition of the person, their spouse or minor child). In the ATO’s example, a man who moved overseas in 2016 and died in 2025 was excluded, and his Australian resident daughter could not claim the exemption even though she sold within two years. This often affects parents who retired to Malaysia, Hong Kong or Taiwan years ago but kept the Melbourne family home.
The beneficiary
A beneficiary’s residence is tested at the time of sale. A beneficiary who is an excluded foreign resident cannot rely on their own occupation of the home. On the wording of section 118-195, the two-year route does not test the seller’s own residence, but the ATO’s general statements are framed broadly, so a non-resident beneficiary relying on it should confirm the position before selling. See Capital Gains Tax and Overseas Beneficiaries.
The 50% discount
Where a gain is taxable, an Australian resident individual may generally apply the 50% discount if the asset was held for 12 months. For an inherited asset the deceased’s ownership counts, except for a pre-CGT asset, where the 12 months runs from death. Foreign residents are generally not entitled to the discount for periods after 8 May 2012.
Withholding and clearance certificates
For contracts from 1 January 2025, the purchaser must withhold 15% of the price of any Australian real property, with no minimum threshold, unless the vendor provides an ATO clearance certificate by settlement.
- An Australian resident executor should apply early: processing can take up to 28 days, and the certificate is valid for 12 months. The trustee applies, using the vendor name on the title.
- Foreign resident vendors cannot obtain a clearance certificate but may apply for a variation, for example where the gain is exempt.
- Withheld amounts are credited when a return is lodged, but distributions are delayed. See Deceased Estate Property Sales: A Note for Real Estate Agents.
Executor sells, or beneficiary sells?
The exemption is available either way, and the two years runs from death in both cases. The choice affects who reports any taxable gain, whose residence matters for withholding, whether the occupation route is open, and how proceeds are shared. Similar rules apply to a surviving joint tenant, although that property passes outside the Will (see Joint Names or Your Will?).
Worked examples (illustrative figures only)
Example 1: sold within two years
Mei bought her Box Hill home in 2004 and lived there until she died in March 2025. Her executor rents it out, then sells; settlement is in February 2027. The gain is fully disregarded. Had settlement slipped to April 2027, the full exemption would be lost unless an extension applied.
Example 2: kept, then partly rented
Wei’s father bought a house in 1982 and died in 2023; its market value at death was $1,000,000. Wei lived there for a year, rented it for two, and sold three years after the death with a $150,000 gain. Total days run from death (about 1,095), of which 730 were not his main residence. Taxable gain: $150,000 × 730 ÷ 1,095 = $100,000. As an Australian resident holding for over 12 months, Wei may apply the 50% discount, leaving $50,000.
Example 3: the deceased lived overseas
Mr Tan bought a Melbourne apartment in 2001, lived in it until he moved back to Penang in 2014, and died there in 2026. As an excluded foreign resident at death, no main residence exemption applies even if his Australian resident son sells within two years. The son generally takes his father’s cost base, and the whole gain is taxable, subject to the discount rules.
CGT changes from 1 July 2027
The first stage of the reforms announced in the 2026–27 Budget, the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, is now law. From 1 July 2027 the 50% discount is replaced by cost base indexation for gains accruing from that date for resident individuals, trusts and partnerships, with a minimum 30% tax on certain net capital gains of individuals. Assets held on 1 July 2027 are treated as reacquired on that date, so a market valuation will often be needed. The ATO has said gains on pre-CGT assets accruing from 1 July 2027 will become taxable, with some exemptions, and that the main residence exemption is unchanged. Guidance on inherited assets has not yet been published and some elements are still to be legislated, so estates holding property across 1 July 2027 should take advice and keep valuation evidence.
Practical points and common mistakes
- Counting two years to the contract date rather than settlement.
- Waiting for a better market, which does not support an extension.
- Assuming that renting after death loses the exemption under the two-year route.
- Overlooking that a parent who lived overseas for years may have been an excluded foreign resident.
- Relying on an informal family arrangement instead of a right in the Will.
- No date-of-death valuation, or no records of purchase price, improvements, rental and absences.
- Leaving the clearance certificate too late, so 15% is withheld at settlement.
Keep the grant, date-of-death valuation, purchase and improvement records, evidence of use (aged-care moves, leases), residency evidence, executor costs, contract and settlement statement and, for any extension, records of the delay and when the property was listed.
Cross-border estates
Where family members are spread across Australia and Asia, overseas steps often drive the timetable: death certificates and household registration records from China, Hong Kong, Taiwan, Singapore or Malaysia, notarisation and translation, and coordinating executors in different countries. These can consume much of the two years, so the sale timetable should be planned from the outset and reasons for any delay recorded as they arise. Executors living overseas should also consider how their residence affects withholding.
How we can assist
We act for executors and beneficiaries in obtaining probate, managing the sale or transfer of estate property within the relevant time frames, documenting circumstances that may support an extension, coordinating with accountants on CGT and withholding, and handling overseas documents and executors. Tax outcomes depend on the facts, and advice from an accountant or registered tax adviser should be obtained before a sale.
Related reading
Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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