Disposal of a property that is not your main residence the whole time usually attracts capital gains tax (CGT). However, there are special rules on disposal of a dwelling that was inherited from a deceased person where under certain circumstances the CGT may be partially or wholly exempt.
Dwelling acquired by the deceased before 20 September 1985
When you inherit a dwelling that was acquired by the deceased person before 20 September 1985, you get a full exemption on the disposal of this dwelling if one of the following conditions is met:
A. You sell the property within two year from the deceased death
The property needs to be sold and settled within two years of the date of death, and the exemption applies regardless of whether the property had been used by the deceased person or yourself as the main residence.
B. Between the date of death and the end of your ownership, the dwelling has not been used to produce income and is the main residence of:
a. You personally as a beneficiary, or
b. The deceased person’s spouse immediately before the death, or
c. An individual who has the right to live in the dwelling under the will
Dwelling acquired by the deceased on or after 20 September 1985 and passed to you before 20 August 1996
Capital gains or losses can be disregarded from the sale of the property if the dwelling was never used to produce income and is used as the main residence by the deceased person and any eligible person discussed above the whole time.
Dwelling acquired by the deceased on or after 20 September 1985 and passed to you on or after 20 August 1996
CGT is exempt on the sale of the property if the property was used as the deceased person’s main residence just before the death, and:
You (or any eligible person discussed above) use it as the main residence until disposal, or
You sell and settle the property within two years
You may apply to the Australian Tax Office for an extension of the two year period if a longer period is required to dispose and settle the property. The extension may be granted under circumstances such as when there are disputes in the administration of the will or other unforeseeable circumstances that are out of your control.
Partial exemption
You may be entitled to a partial exemption even if you don’t qualify for a full exemption. This may be the case for example when you didn’t use the property as your main residence for the whole ownership period.
In this case, capital gains are calculated as:
Capital gain amount x non-main residence days / total days
Cost base of an inherited dwelling
When calculating capital gains, there are special rules to work out the cost base of the property. Ordinarily the cost base is the deceased person’s cost base. However, under the following circumstances, market value at the date of death will substitute the original cost base:
The dwelling was acquired by the deceased person before 20 September 1985
The dwelling was passed to you after 20 August 1996 and was used as the deceased person’s main residence just before the death
The dwelling was passed to you as trustee for a special disability trust
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