While selling the family home is, in nearly all situations, tax-free, the capital gains tax (CGT) treatment can become more complex when a property is sold following the death of the owner.
CGT can still be eliminated or significantly reduced, but this often depends on careful planning, both when the Will is drafted and during the administration of the Estate.
Two-Year Rule: The Primary CGT Exemption
The most important rule is that the sale of the home will be tax-free if it is sold within two years of death by either:
- the deceased estate, or
- the beneficiaries
provided the home was the deceased’s main residence just before death.
The Australian Taxation Office (ATO) has discretion to extend the two-year exemption period and will often do so where there are clear reasons for the delay that were outside the taxpayers’ control. The most common example is where the Will is subject to a legal dispute that prevents the property from being sold.
Ongoing Main Residence Occupation After Death
Even if the two-year time limit is exceeded, the sale can still be tax-free if, from the date of death until sale, the property is continuously the main residence of:
- the deceased’s spouse
- another individual who has a right to occupy the home under the Will, or
- the beneficiary who inherited the home under the Will
Why the Will Matters
The second category is particularly important. For example, a mother leaves her home equally to a daughter and two sons, but the Will allows one son to live in the house for five years before it is sold.
If this right to occupy is explicitly included in the Will, the entire property can remain CGT-free when sold.
However, if this arrangement is merely an informal agreement between the siblings, only the one-third interest of the son living in the home will be tax-free. The remaining two-thirds owned by the brother and sister will be subject to CGT.
Broadly, their capital gain would be calculated based on the increase in market value from the date of the mother’s death to the eventual sale of the home.
Aged Care and the Main Residence “Absence Rule”
Another increasingly common scenario arises when the deceased moved into aged care before passing away and the home is sold several years later.
In these cases, the absence rule may apply, allowing the home to continue to be treated as the deceased’s main residence even after they physically moved out:
- If the home is not rented, there is no time limit on the exemption
- If the home is rented, the exemption is limited to six years
When the Absence Rule Is Partially Exceeded
If the absence rule applies for the entire period, the home will retain the full CGT main residence exemption and the usual post-death rules will apply.
If rent is received and the six-year absence limit is exceeded, a pro-rata CGT exemption is available based on the proportion of “main residence days” to total ownership days.
Example
Phoebe owned her home for exactly 19 years, and it was sold one year after her death. For the final nine years of her life:
- Phoebe lived in a nursing home
- Her property was rented
She can treat six of those nine years as exempt, but:
- three years are “non-main residence days”, and
- the entire one-year period from her death until sale is also non-exempt
This means:
- the home is exempt for 16 out of 20 years, and
- 20% of the total capital gain (4 out of 20 years) is taxable to the Estate
Key Takeaway
While selling the family home is usually tax-free, the devil is in the detail when the property is inherited from a deceased estate. Timing, occupancy, rental history, and critically the wording of the Will can all have a significant impact on the final tax outcome.
Careful planning can make a substantial difference to how much CGT is ultimately payable.
