The Main Residence Exemption For Deceased Estates Explained
A transfer of property ownership 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.
But what does this mean for a deceased estate? 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 Main Residence Exemption?
The main residence exemption is a provision in Australian tax law that allows homeowners 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 main residence exemption can provide significant tax savings for taxpayers when they sell their home. However, it is important to note that the exemption is not automatic, and taxpayers must meet certain eligibility requirements in order to claim it, including:
- The dwelling was considered 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 property in Australia, you may be exempt from paying capital gains tax (CGT). This is because inheriting property isn’t considered a CGT event. However, if you decide to sell the property, CGT on the inherited property 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 the main residence?
- Was it an investment property used to generate an income?
- When did the deceased purchase or acquire the property?
- What is the deceased’s date of death?
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 1995. 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.
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 is 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 your main residence, you may qualify for a partial exemption.
The exemption is calculated based on the number of “non-residence” days.
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).
She would then have to use those amounts in the following formula:
Capital gain x (non-residence days ÷ total days owned) = taxable amount.
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 Tax 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!
“This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.”
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002