The Main Residence Exemption For Deceased Estates Explained

A transfer of property ownership, whether a personal residence or a property investment, can trigger a capital gain or loss, which in turn may have significant tax implications. However, as part of the Australian Tax Office’s capital gains tax exemptions and concessions, you are generally exempt from paying CGT on the sale of your main residence. 

How are deceased estates taxed, and does the main residence exemption still apply?

Dealing with capital gains tax rules can seem like a relatively straightforward process, but it’s not as simple when you consider the different situations and timelines involved.

So, here’s what you need to know about the main residence exemption for deceased estates and how you may trigger CGT liability on the sale of inherited property. 

What Is the Capital Gains Tax Main Residence Exemption?

The main residence exemption is a provision in Australian tax law that allows homeowners  (tax residents who meet certain criteria) to exclude the capital gain from the sale of their home from their taxable income. To be eligible for the exemption, the property must have been the taxpayer’s main residence for all of the time they owned it. 

A partial exemption could also apply to properties that are not the taxpayer’s main residence, such as investment properties if they were used as a residence at some point during the ownership period. 

The CGT exemption for main residences can provide significant tax savings for taxpayers when they sell their homes. However, you should note that the exemption is not automatic when you pay tax; you must meet certain eligibility requirements in order to claim it, including: 

• The dwelling was the taxpayer’s main residence for the duration of the ownership period; 
• it is common knowledge that the taxpayer stores personal belongings on the property;
• The dwelling’s address appears on the taxpayer’s electoral roll registration; 
• The connection of utilities (such as gas and electricity) is in the taxpayer’s name, and 
• The taxpayer receives mail at the dwelling’s address. 

 

If you would like to find out more about other CGT exemptions, make sure to check out our guide on capital gains tax for property investments. 

Does the Main Residence Exemption Apply After the Deceased’s Death?

When you inherit a deceased estate property in Australia, it may be exempt from paying capital gains tax (CGT). This is because inheriting property isn’t considered a CGT event. And while Australia doesn’t impose an inheritance tax, if you decide to sell the inherited property, CGT may apply.

The main residence exemption may apply in certain situations where capital gains tax is payable, but this depends on several different factors. You’ll need to ask yourself the following questions: 

• Was the property used as a main residence?
• Was it an investment property used to generate an income?
• When did the deceased person purchase or acquire the property?
• What is the deceased’s date of death?
• What was the deceased person’s tax residence status?

The answers to the above questions will dictate whether or not the main residence exemption is applicable. 

When Does the Full Main Residence Exemption Apply to the Deceased Estate?

There are different scenarios when the full main residence may apply:

The Deceased Died Before 20 September 1985

If you’re inheriting a property that was owned by someone who died before September 20, 1985, you may be exempt from capital gains tax. This is because the property is considered a pre-CGT asset.

However, you will need to consider any capital improvements made to the property after September 20, 1985. If the property underwent renovations for the purpose of generating income, then you’ll be liable to pay CGT on the part of the property that was improved. 

The Deceased Acquired the Property Before 20 September 1985

If the deceased acquired the property before September 20, 1985, but you inherited the property after that date (in other words, the deceased’s death was after September 20, 1985), you may still be eligible to claim a full exemption.

However, there is a two-year window (from the date of death) to sell the deceased’s main residence before it is assessed for capital gains tax. So, if you sell the property within two years from the date of the deceased’s passing, you’ll be fully exempt from CGT.

Example: Main Residence Exemption Deceased Estate 

Penelope purchased a flat in October 1980 with the help of a real estate agent. She was the sole occupant of the flat and did not use it, at any point, as an investment to produce income. 

Unfortunately, Penelope died of natural causes in May 2021, leaving the flat to her daughter, Emilia. Emilia never moved into the flat, and decided to generate rental income from it while she weighed up the decision of keeping the flat or selling it. 

After 18 months, she decided to sell the property. 

This means that Emilia is fully exempt from CGT because she disposed of the property within two years of her mother’s death. 

 

If, however, you (a nominated beneficiary or the deceased’s spouse) decide not to turn the property into an investment and instead treat it as your main residence, you’ll be exempt from paying CGT on the inherited property as long as you do not claim any other main residence and satisfy strict conditions. 

Example: Deceased’s Main Residence 

Jason bought his first property in May 1982. 

When he died in March 2018, his nephew, Matthew, inherited the property on the condition that Jason’s surviving spouse, Lucy, holds a right of occupation of the property until it is eventually sold. Lucy moved into the property and treated it as her main residence. 

Following Lucy’s passing in 2020, Matthew decided to sell the property. 

Due to the fact that Lucy moved into the property and treated it as her main residence following the estate administration process, Matthew could be entitled to a full main residence exemption. 

If the Full Exemption Doesn’t Apply, Are You Entitled to a Partial Exemption?

Fortunately, yes, you may be entitled to claim only a partial exemption if you don’t meet the criteria for the full exemption. However, whether you are able to claim the partial exemption will be entirely dependent on how the deceased used the property just before their passing. 

In other words, did the deceased immediately use the property as their main residence? Or was it an investment property to produce assessable income? 

If the property was used as an investment just before the deceased died and you (the beneficiary who inherited the property) didn’t sell the property but instead appointed it as their main residence, they may qualify for a partial exemption. 

The exemption is calculated based on the number of “non-residence” days. 

Example

Edward bought an investment property in November 2008 for $480,000. The property was solely used to generate a rental income and was never considered his main residence. 

Following his passing in June 2014, Edward left the property to his sister Callie. Having only ever rented her home, Callie decided to move out of her rented apartment and appointed the inherited property as her main residence. 

Callie lived in the property until April 2022 and eventually sold it for $780,000. 

Unfortunately, because the property was used for investment purposes just before Edward died, Callie won’t be fully exempt from CGT. But she will be able to claim a partial exemption for the time that she lived in the property as her main residence. 

In order to calculate the taxable amount, Callie would have to establish the number of days that Edward used the property for investment purposes as well as the total number of ownership days (in other words, the deceased’s ownership period and Callie’s ownership period). 

What is the Deceased Estate 3-Year Rule?

While not directly related to capital gains tax, there is a different rule that some people confuse with the two-year main residence rule. The three-year rule, relates to the taxation of income earned by a deceased estate.

Normally, a trustee who is assessed on the net income of a trust pays tax at the top marginal tax rate. However, when lodging the first trust tax return for a deceased estate, a concessional rate of tax can be applied for. This concessional rate is equivalent to individual income tax rates and includes the benefit of the full tax-free threshold.

The concessional rate is applicable for the first 3 income years of the deceased estate. This period can’t be extended beyond the first 3 income years. During this time, deceased estates do not receive the benefit of tax offsets (concessional rebates), such as the low-income tax offset. Additionally, no Medicare levy is payable.

Example: 

If Joan passed away on 5 April 2023:

• The first income year for Joan’s deceased estate would be from 6 April 2023 to 30 June 2023.

• The second income year would be from 1 July 2023 to 30 June 2024.

• The third income year would be from 1 July 2024 to 30 June 2025.
• If Joan’s deceased estate earned taxable income of $18,200 or less during these years, no tax would be payable.

For deceased estates that continue to be administered beyond the third income year, different tax rates apply. For instance, from the years 2020–21 to 2022–23, the tax rates vary based on the taxable income of the deceased estate, with rates ranging from nil for incomes up to $416 to 45 cents for each $1 over $180,000.

How Can Property Tax Specialists Help?

Identifying your eligibility for a full exemption can be complex, and calculating your partial exemption can be pretty tricky.

That’s where Property Tax Specialists can help. 

We have years of experience working with the Australian Taxation Office, and we know the ins and outs of the main residence exemption process. We’ll help you identify your eligibility for a full exemption, and we’ll calculate your partial exemption so you don’t have to worry about it. 

Contact us today to learn more!

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