Capital Gains Tax and the Main Residence Exemption for Deceased Estates
Tax Law: 16 February 2026
Author: Marco Saccotelli - Our People
Dealing with a deceased estate is challenging enough without unexpected tax surprises. Learn how the main residence exemption works, when it applies, and what to watch out for to protect the estate's value.
Most people are aware that when they sell their home, they will not have to pay capital gains tax provided that they own the home in their individual names (not as trustees of a trust) and the property was genuinely their main residence. However, there are special rules that apply to a deceased estate that sells a deceased’s person’s home or a beneficiary who receives a transfer of the deceased’s home and then sells it.:
CGT Treatment of Assets When Someone Dies?
As with all CGT assets, the death of an individual is not a taxable event. Under Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) an automatic rollover occurs so that the cost base held by the deceased can be passed to an executor and then a beneficiary. Only when the executors or the beneficiary sell the asset, will a capital gain need to be calculated.
For an asset acquired by the deceased before 20 September 1985 (a ‘pre-CGT’ asset), the executor is deemed to have acquired the asset on the date of death and with a cost base equal to the market value of the asset at date of death. For a post-CGT asset, the deceased’s original cost base will be inherited by the executor or beneficiary. For the purposes of the general 50% CGT discount in Division 115 of ITAA 1997, an executor or beneficiary who receives a pre-CGT asset of the deceased will be deemed to have acquired it on the date of death. For a post-CGT asset, the executor or beneficiary will be deemed to have acquired it on the date that the deceased acquired it. Usually, therefore, the executor or beneficiary will readily satisfy the 12 month holding rule under Division 115.
Also, a transfer of title to the asset from the executor’s name to the entitled beneficiary’s name will be ignored for CGT purposes.
How to get the Full CGT Exemption
When Can a Deceased Estate Claim the Main Residence Exemption?
For a deceased estate sale scenario involving a main residence, there are several conditions that must be met for a full CGT exemption under s.118-195 of ITAA 1997:
(a) For a home that was acquired post-CGT by the deceased, the deceased must have been living in the home just before they died (some exceptions apply such as hospital stays and moving to aged care) and it must not have been rented just before death; and
Either:
- (a contract of sale is signed within 2 years of date of death (or where there are good reasons such as estate litigation or unforeseen circumstances - as extended by the ATO on application); or
- the home is occupied from the date of death through to when the home is sold by an executor or the entitled beneficiary, as the main residence of the deceased’s spouse or a person who was named as having a right of occupation under the deceased’s Will or the entitled beneficiary who ends up selling the home.
(b) For a pre-CGT acquired home of the deceased, either the 2 year sale rule or the continuous occupation rule (spouse, occupant under a right to occupy or beneficiary) is satisfied.
Where these strict tests are not met, a partial exemption under s.118-200 is available requiring a comparison of ‘main residence days’ versus ‘non-main residence days’ resulting in a portion of the capital gain being taxable. For example, if a person under the Will who has a right to occupy has lived in the property for a long time but leaves the property before the sale event, then a smaller fraction of the gain would be subject to taxation.
What goes wrong? Common CGT Pitfalls in Deceased Estates
We have seen cases where a change in beneficial ownership occurs without a transfer of land or a declaration of trust being signed.
For example, an aged parent moves out of their home and wants one of their adult children to commence occupation, take over the mortgage, maintenance, insurance, rates and utilities. The intention of the parties is that effectively an inter vivos inheritance occurs. Unfortunately, the title remains in the name of the parent and when they die it can be very difficult to satisfy the full exemption because the deceased did not live there just before death (most homes are post-CGT acquired given that CGT commenced 40 years ago).
One solution is to apply to the ATO for a private binding ruling on the basis that a common intention constructive trust arose when the parent moved out. The circumstances (the adult child paying all of the holding costs for the property, paying for renovations and improvements out of their own financial resources and the conversations at the time) can demonstrate that the beneficial interest changed when the parent agreed to hand over ownership. The ATO should agree and if they do not for purely revenue purposes, then an objection can be lodged to the adverse PBR decision. However, this approach is far from ideal.
The above illustrates that clients should put things in writing! Sign over the house through a transfer of land or at the very least execute a declaration of trust. The parent will not have a CGT liability because the standard main residence exemption will apply and the child will have strong evidence that when they sell the property in the future the standard main residence rules also apply. Family arrangements that remain verbal can cause significant headaches down the track especially in the field of deceased estates where the parent is no longer alive and the siblings may suddenly have different recollections of past verbal agreements.
If you are dealing with a deceased estate or are unsure whether the main residence exemption applies, we can provide clear and practical advice tailored to your situation. Understanding the CGT implications early can prevent costly mistakes and ensure the estate is administered correctly.
Please contact Marco Saccotelli, Special Counsel at Aitken Partners, to speak about your obligations and options. We’re here to help guide you through the process with confidence.
Additional information can be found at the official ATO page relating to property and capital gains tax.