How to Avoid Paying Capital Gains Tax on Inherited Property in Australia

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IntroductionInheriting a property can be both a blessing and a challenge. While it's often a valuable asset, navigating the tax implications—especially Capital Gains Tax (CGT)—can be complex. In Australia, CGT may apply when you sell an inherited property, depending on several factors such as the date of acquisition, how the property was used, and how quickly it was sold. At Trinity Accounting Practice, we guide clients through every step of this process to help them understand their obligations and explore legal ways to minimise or even avoid CGT on inherited property.

In this comprehensive guide, we explain when CGT applies, the key exemptions, and strategies that can reduce or eliminate your CGT liability.

1. Understanding Capital Gains Tax on Inherited Property

Capital Gains Tax is not a separate tax but part of your income tax. It applies when you make a profit from selling an asset, including inherited property.

For inherited property:

• CGT doesn’t apply when you inherit the property
• It may apply when you sell the property, depending on various conditions

Key definitions:

• Deceased estate: The assets of a person who has passed away
• Cost base: The original purchase price plus eligible expenses
• Market value substitution rule: Used when no cost base records are available

2. When Does CGT Apply to Inherited Property?

CGT may apply if:

• You sell the inherited property and make a profit
• The property was not the deceased's main residence at the time of death
• You rent out or use the property for income before selling

You may avoid CGT if:

• The deceased acquired the property before 20 September 1985 (pre-CGT asset) and certain conditions are met
• The property was the deceased’s main residence and not used to produce income
• You sell the property within two years of the date of death (with some exceptions)

3. Key CGT Exemptions on Inherited Property

There are three main CGT exemptions that may apply:

3.1. Two-Year Rule (Main Residence Exemption)

You may be fully exempt from CGT if:

• The deceased acquired the property after 20 September 1985
• The property was their main residence and not used to produce income (e.g., rented)
• You sell the property within two years of the date of death

Pro tip: If the property cannot be sold within two years due to legal delays or complexity, you can request an extension from the ATO.

3.2. Pre-CGT Assets (Acquired before 20 Sept 1985)

If the deceased acquired the property before 20 September 1985 and:

• You sell it within two years, and
• It was their main residence and not income-producing

...then no CGT applies.

3.3. Partial Main Residence Exemption

If the property was used partly to produce income (e.g., rented), you may qualify for a partial exemption. The CGT will apply proportionally based on the period and extent of income-producing use.

4. Calculating CGT on Inherited Property

If CGT does apply, it is calculated as:

Capital Gain = Sale Price - Cost Base

The cost base will depend on:

• If the property was pre-CGT: market value at date of death
• If the property was post-CGT: the deceased's original purchase price + improvements + costs

Other factors include:

• Selling costs (agent fees, legal costs)
• Capital improvements made by you or the deceased
• Ownership percentage (for jointly inherited property)

You may also be eligible for the 50% CGT discount if the property was held for 12 months or more before sale.

5. Strategies to Avoid or Minimise CGT

Here are practical and legal strategies we help clients implement:

5.1. Sell Within the Two-Year Window

If eligible, selling within two years offers a full CGT exemption. We can:

• Help you plan and coordinate the sale timeline
• Manage estate administration with your solicitor

5.2. Live in the Property as Your Main Residence

If you move into the property and make it your main residence:

• You may extend the CGT exemption beyond two years
• This applies if you occupy it and sell while it's still your main residence

5.3. Apply for ATO Discretion (Extension of Two-Year Period)

If delays were beyond your control, we can help you:

• Prepare an ATO ruling request
• Justify reasons (e.g., family disputes, probate delays)

5.4. Seek Partial Exemptions and Apportionment

Even if a full exemption doesn't apply:

• You may get partial CGT relief for non-income-producing periods
• We calculate exact taxable gains to avoid overpayment

5.5. Claim Deductible Expenses and Improvements

We ensure the cost base includes:

• Legal and conveyancing costs
• Capital improvements (e.g., renovations, landscaping)
• Property holding costs (if allowed)

6. Real-Life Example: How We Helped a Client Avoid CGT

A client inherited a Sydney property in 2021. It was:

• The deceased’s main residence
• Never rented out

We:

• Confirmed the property qualified for the main residence exemption
• Worked with the client’s solicitor to finalise probate
• Listed and sold the property within two years

Outcome: No CGT applied. The client saved over $120,000 in potential tax.

7. Record Keeping for Inherited Property

Good records are essential. We help clients:

• Obtain probate documents
• Get the date-of-death market valuation
• Track any renovations or costs incurred by the estate or beneficiary
• Maintain ownership records for future ATO audits

8. When CGT Is Unavoidable: What You Can Do

If CGT does apply, we assist by:

• Calculating the exact amount owed
• Applying the 50% CGT discount where eligible
• Structuring the sale to spread tax over financial years
• Advising on tax-effective investment of sale proceeds

9. Common Mistakes to Avoid

• Waiting too long and missing the two-year exemption
• Renting out the property too soon
• Failing to get a professional valuation at the date of death
• Underestimating the impact of improvements or renovations
• Selling without understanding eligibility for exemptions

10. Why Work with Trinity Accounting Practice?

• Proven expertise in estate and property tax
• ATO-compliant strategies to minimise CGT
• Experience working with solicitors, agents, and beneficiaries
• Located at 159 Stoney Creek Road Beverly Hills NSW 2209
• Weekend & after-hours consultations available

11. Book a Consultation Today

Don’t risk paying unnecessary tax on inherited property. Let our team guide you through smart, compliant solutions tailored to your situation.

📌 Book now: https://calendly.com/ramy-hanna
📞 Call: 02 9543 6804
📍 Visit: 159 Stoney Creek Road Beverly Hills NSW 2209
🌐 Website: www.trinitygroup.com.au

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