Schedule 3 of 6 · The house

Selling the family home after a death: the two-year rule

A home inherited from someone who died is usually free of capital gains tax if it is sold under a contract that settles within two years of the death, as long as it was their main residence just before they died and wasn’t earning income, or they bought it before 20 September 1985. Outside those two years the exemption can still apply, in full or in part, depending on who has lived in the house since.

General information, not tax advice. The ATO’s pages on inherited property are the official reference, and a registered tax agent can work through the rules for one property.

The ATO says capital gains tax changes from the 2026–27 Federal Budget are now law and apply from 1 July 2027: for individuals, trusts and partnerships, the 50% CGT discount is replaced by cost base indexation and a 30% minimum tax rate, for gains that accrue after that date. This page describes the rules on the ATO’s pages as at October 2026; for a sale after 1 July 2027, check the ATO’s page on the reform first.

3.1Inheriting is not the taxed moment

Australia has no inheritance or estate tax. When a house passes to a beneficiary under a will or the rules for someone who died without one, there is generally no capital gains tax at that point; the question arises when the house is later sold. The same main residence exemption is available whether the beneficiary sells it or the executor sells it as trustee of the estate.

Two conditions sit underneath everything below. The property must include a dwelling, and the land and the dwelling are sold together: land or a structure sold on its own generally gets no exemption. And where the beneficiary or the person who died is a foreign resident, the exemption is generally not available.

3.2The questions, in the order the ATO asks them

Did the person die before 20 September 1985? Then the house is fully exempt, though major improvements made on or after that date may still be taxed.
Did they buy it before 20 September 1985? Then go straight to the two-year test in question 4.
If they bought it later, was it their home? For an inheritance after 20 August 1996, the test is whether it was their main residence and not used to earn income just before they died; if it was, go on to question 4. For an inheritance on or before that date, it had to be their home, not earning income, for the whole time they owned it; if it was, skip to question 5. A “no” to either means no full exemption, though a partial one may be possible.
Did the sale settle within two years of the death? Then it is fully exempt.
If not, who has lived there since? It is still fully exempt if, from the death until the sale, it was only ever the main residence of the person’s spouse at the time of death (unless permanently separated), someone the will gave a right to live there, or the beneficiary who sells it. Otherwise a partial exemption may apply.

3.3Counting the two years

The ATO counts from the death to settlement of the sale contract, not to the day the contract is signed. During those two years the house can be lived in, left empty or rented out; how it is used doesn’t affect the two-year exemption.

Example, with made-up dates

A parent bought their house in 2003 and lived in it until they died on 14 August 2025. Their child inherits it, rents it out for a year and a half, then signs a contract in April 2027 that settles in June 2027.

The house was the parent’s main residence just before death and wasn’t earning income, and settlement falls inside the two years that run to August 2027, so the sale is fully exempt even though it was rented in between.

3.4When a sale can’t be finished in time

The two years can be extended when the sale is held up by exceptional circumstances outside the owner’s control. Under the ATO’s practical compliance guideline PCG 2019/5, the extension is automatic, with no application, when all five of these are true:

For more than 12 months of the first two years, the sale was held up by one of the listed causes: a challenge to the will or to ownership of the house; a life interest or similar interest in the will; an estate complex enough to delay its administration; a sale contract delayed or falling through for reasons outside the owner’s control; or government restrictions on real estate activity in response to COVID-19.
Once nothing stood in the way, the house went on the market as soon as practicable and the sale was actively managed through to the end.
Settlement happened within 12 months of the listing.
The delay wasn’t mainly caused by waiting for the market to rise, renovating for a better price, the trustee’s or beneficiary’s convenience, or unexplained stretches when the executor did nothing.
The extension needed is 18 months or less.

Where the five conditions aren’t all met, a discretionary extension can be requested from the ATO, usually once the sale has settled, and it is granted only for exceptional circumstances outside the owner’s control. No extension is needed if an eligible person has lived in the house as their main residence from the death to the sale, or if there is no gain to tax.

3.5If the person had moved into care

Someone who had stopped living in their home before they died, for example after moving into a nursing home, may have chosen to keep treating it as their main residence. The ATO suggests asking the trustee or the person’s tax adviser whether that choice was made. If it was, the home can count as their main residence indefinitely if it wasn’t rented out after they left. If it was rented out, it counts until their death or for 6 years after they moved out, whichever came first.

3.6Working out a partial exemption

Where the full exemption isn’t available, the ATO’s method taxes only the share of the gain that matches the days the house wasn’t a qualifying main residence: the capital gain, multiplied by the non-main residence days, divided by the total days. For a house the person bought before 20 September 1985, the total days run from the death to the sale, and the cost base starts at the house’s market value on the day of death.

Worked example, with made-up figures

A parent bought their home in 1978 and died on 1 March 2024. Their child inherited it, rented it out from the death until 1 March 2025, then moved in and lived there as their main residence until the sale settled on 1 March 2027. Measured from the market value at the date of death, the capital gain is $300,000.

Total days, 1 March 2024 to 1 March 2027: 1,095.
Non-main residence days, the rented year: 365.
Taxable share: $300,000 × 365 ÷ 1,095 = $100,000.

Because the house was bought before 20 September 1985, the child is treated as owning it from the death, well over 12 months before the sale. An Australian resident with no capital losses to subtract first can then reduce the $100,000 by the 50% CGT discount, to $50,000.

3.7A house owned as joint tenants

When one joint tenant dies, the survivor takes their share by right of survivorship, outside the estate. For capital gains tax, though, the share is treated as passing to the survivors in equal parts as if they were beneficiaries, so a survivor may get the main residence exemption on the share they took over if it was the home of the person who died. How the title itself is changed after a death is in transferring land after a death.