When someone passes away and leaves you property, shares or other assets, you might think it’s all upside. But while inheritance isn’t taxed directly in Australia, capital gains tax (CGT) can apply when you eventually sell the inherited asset. The short answer: you won’t pay CGT when you inherit an asset, but you may face a CGT bill when you sell it, and the tax treatment depends heavily on what kind of asset it is, when it was acquired, and how you use it after inheriting it.
In this guide, we’ll break down how CGT works on inherited assets in Australia, including:
- When CGT applies (and when it doesn’t)
- How to calculate the cost base of inherited assets
- Special rules for the family home
- CGT exemptions and discounts
Let’s unpack the rules so you can avoid unexpected tax surprises and make informed decisions.
What Is Capital Gains Tax and How Does It Apply to Inherited Assets?
In Australia, capital gains tax isn’t a separate tax, it’s part of your income tax. A capital gain arises when you sell an asset for more than its cost base (what you paid for it, plus associated costs). A capital loss arises when you sell for less.
With inherited assets, the cost base is usually worked out based on the asset’s value when the deceased passed away, but it depends on when the deceased originally acquired it.
Crucially, you don’t pay CGT when you inherit, only if and when you sell the asset later.
When CGT Applies to Inherited Assets
Inherited assets fall under CGT rules if:
- The asset is not your main residence (e.g., an investment property, shares, crypto, etc.)
- You sell the asset at a later time
- The asset was acquired by the deceased after 20 September 1985 (when CGT was introduced)
Let’s explore how these rules apply depending on the type of asset.
1. Inherited Property and CGT
Real estate is one of the most common types of inherited assets, and the CGT treatment can vary significantly.
A. If the Property Was the Deceased’s Main Residence
If the deceased owned the property as their main residence and did not use it to produce income (i.e., they didn’t rent it out), the asset may qualify for a full CGT exemption, if:
- You sell the property within two years of the deceased’s death, or
- It becomes your main residence for a period before selling
This is known as the main residence exemption.
Example: Your mother passes away in 2022 and leaves you her home in Melbourne, which she lived in until she died and never rented out. If you sell the house within two years, there’s no CGT to pay, regardless of how much the property has increased in value.
B. If the Property Was an Investment or Rented Out
If the deceased rented out the property at any time, or if it wasn’t their main residence, then:
- CGT will apply when you sell it
- The cost base is generally the market value at the date of death
If the property was purchased before 20 September 1985, different rules apply (see below).
2. Inherited Shares, Units and Other Investments
If you inherit shares or other financial instruments:
- CGT is triggered when you sell them, not when you inherit them
- The cost base is typically the market value at the date of death, assuming the shares were acquired after 20 September 1985
- You may also be eligible for the 50% CGT discount if you hold the shares for at least 12 months before selling
Tip: Always keep documentation showing the value at the date of inheritance, as this will form the basis of your CGT calculation.
3. CGT and Pre-CGT Assets
If the deceased acquired the asset before 20 September 1985, it’s considered a pre-CGT asset. In that case:
- The asset is exempt from CGT until you sell it
- Once you inherit it, it becomes subject to CGT from the date of inheritance
- Your cost base is the market value at the date of death
Example: Your uncle bought a property in 1980. He passes away in 2024 and leaves it to you. The property’s pre-CGT status is lost when you inherit it. Your cost base is the market value in 2024.
4. The 2-Year Rule and Main Residence Exemption
As mentioned earlier, there’s a generous exemption for inherited homes if you sell within two years. But what if you don’t?
You can still claim a partial CGT exemption, based on the time the property was used as a main residence versus the time it was used to earn income (e.g., rented out).
Tip: The ATO may allow extensions beyond the two-year window in some circumstances, such as delays in getting probate. It’s worth seeking professional advice here.
5. Calculating Capital Gains on Inherited Assets
Here’s the general formula:
Capital gain = Sale proceeds – Cost base
The cost base includes:
- Market value at the date of death
- Legal fees (e.g., probate)
- Stamp duty (if any)
- Repairs and improvements made after inheriting
If you make a capital loss, it can be used to offset other capital gains, but it can’t reduce your taxable income.
Pro tip for accountants and executors: Keep records of valuations, dates, and improvement costs. It saves your client time (and money) when they eventually sell.
6. Capital Gains Tax Discount on Inherited Assets
You may be eligible for the 50% CGT discount if:
- The asset was held for at least 12 months before selling (including time the deceased held it)
- The asset was acquired after 20 September 1985
For property, this holding period is calculated from when the deceased acquired the asset. So if your father held an investment unit for 10 years and you inherit it, you don’t need to wait another year to sell it with the discount—you already qualify.
7. CGT and Deceased Estates: Executor Responsibilities
If you’re the executor of a deceased estate:
- You’re not personally liable for CGT, but you must administer the estate correctly
- The estate can sell assets during the administration period and pay CGT on any capital gains
- You should obtain a valuation for each asset at the date of death for CGT purposes
Final Thoughts: Plan Ahead to Avoid Unwanted Tax Surprises
While there’s no inheritance tax in Australia, capital gains tax can significantly reduce what beneficiaries walk away with. The key is understanding how CGT applies to different types of inherited assets, the timing of the sale, and whether exemptions apply.
Whether you’re a beneficiary or an executor, getting professional advice early on will help you make smart decisions and minimise tax.
About The Author: Artur Osadchiy
Artur is a Certified Practising Accountant with over 30 years’ experience working as a trusted advisor to 600+ clients across Australia. Based in Melbourne, he started Tax Window with his wife Marina in 2009 and leads the firm’s tax and accounting team. In his free time, Artur enjoys watching the AFL (go Kangas!) and spending time with family.
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