Capital Gains Tax on Inherited Property: How to Reduce What You Pay

Anitra Issa

Inheriting property is a complicated experience. Amidst the grief, there are also significant financial responsibilities to consider. One of the most important is understanding the tax implications, particularly when it comes to capital gains tax (CGT). Without proper knowledge, you could end up paying more tax than necessary when you eventually sell the property. However, with careful planning, it is possible to reduce or even eliminate the amount of CGT you need to pay. Read on to learn how to avoid capital gains tax on inherited property.

Do You Pay Tax on an Inheritance in Australia?

The good news is that inheriting a property itself doesn’t trigger capital gains tax. In Australia, there’s no inheritance tax, so you won’t pay tax just for inheriting property, money, or assets. However, CGT may apply if you sell the inherited property, depending on several factors.

A key advantage when selling inherited property is the step-up basis. This was once the case but is no longer so for properties that were an investment that the deceased held. For a deceased’s PPR, you inherit the cost base at the time of death. For an investment property that the deceased held, you inherit the deceased’s cost base. That is, the cost that they paid for it. This means you’re only taxed on the gain from that point forward. You won't pay tax on the increase in value since the deceased initially purchased the property.

How Capital Gains Tax Works for Inherited Properties

When the inherited property is sold, a legal personal representative compares the selling price to the cost base. This enables them to calculate any capital gain or loss. This gain is further divided between the period from the date of death to the settlement and the time the beneficiary owned the property.

Once you've determined the capital gain, the CGT is applied to that gain based on your income tax rate.

The tax rates for individuals in the 2024-2025 financial year are:

Taxable Income	Tax Rate
Up to $18,200	0% (tax-free threshold)
$18,201–$45,000	19%
$45,001–$120,000	32.5%
$120,001–$180,000	37%
Over $180,000	45%

If you want personalised support with your tax affairs, our experienced and certified tax accountants can help. To kick things off, give us a call at 1300 728 875 or fill out a contact form.

Several rules and exemptions can influence your CGT liability:

If the property was the deceased's principal residence (PPR) and you sell it within two years, it may be exempt from CGT, even if rented during that time. If you keep it as a rental beyond two years, the property will no longer qualify for the full PPR exemption. However, you will still inherit the cost base at the date of death.
If the property wasn’t the deceased’s main residence or was used for generating income (such as being rented out), you may still qualify for a partial CGT exemption. This could limit CGT to only the period during which the property was used as an investment rather than a primary residence. The extent of the exemption would depend on the specific circumstances.
Properties inherited before September 20, 1985, are generally exempt from Capital Gains Tax (CGT). This is unless substantial improvements were made to the property after that date. The exemption applies based on the date of inheritance, not the property's age. This can significantly reduce the tax liability for those inheriting older properties.
Foreign residents may be subject to different rules. They may not qualify for the same CGT exemptions that apply to Australian residents. It is crucial for foreign beneficiaries to understand the specific tax rules that apply to them when inheriting Australian property.

How to Avoid Capital Gains Tax on an Inherited Property

While it may sometimes seem like there are "loopholes" in the system, there aren’t exactly any secret tricks to avoid CGT entirely. Instead, there are legal strategies, exemptions, and deferrals that you can use to help reduce your CGT liability.

1. Selling a Principal Place of Residence Within Two Years

As mentioned, if the inherited property was the deceased's principal residence, selling it within two years of their death can result in a full CGT exemption. This is one of the simplest and most effective ways to avoid paying CGT.

2. Setting Up a Trust

Setting up a trust for the inherited property can provide greater flexibility in managing the property. It can also offer long-term financial benefits. Additionally, assets held in a trust can sometimes be passed on without triggering CGT at the time of transfer. However, this depends on the structure of the trust.

3. Living in the Property Yourself

Another option is to take ownership of the inherited property and make it your main residence rather than selling it. As long as it remains your home for the whole period that you have owned the property, it hasn’t been used to produce income, and it’s on land of 2 hectares or less, you won’t have to pay CGT when you sell your main residence. Learn more on the ATO website.

4. Holding onto the Property

If you’re not in a rush to sell the property, holding onto it for a period can be beneficial. This is especially true if property market conditions improve. A rise in property values could lead to a higher sale price, which could help offset CGT liabilities.

5. Increasing the Cost Base

If you make capital improvements to the inherited property (e.g., renovations, additions, or other improvements), you can increase the cost base. This in turn reduces the taxable capital gain. By keeping detailed records of any costs incurred in improving the property, you can ensure these costs factor into your CGT calculation.

By using one or a combination of these strategies, you can effectively remove or minimise the tax burden on inherited property and preserve more of its value.

Please note that this is general advice only. If you need specific advice on your own situation, it’s always best to speak to a tax professional or accountant. Get in touch at 1300 728 875 or fill out a contact form to start the process.

Inherited Shares and Capital Gains Tax

Inheriting shares works similarly to property. You’ll only face CGT if you sell the shares for more than this adjusted value.

If the shares come from a superannuation inheritance, special tax rules may apply. Make sure to review these with a professional to avoid unnecessary costs.

Superannuation Inheritance and Tax

If you inherit a superannuation fund, the tax treatment depends on factors like the deceased’s age, your relation to them, and whether the funds are taxable or tax-free components. Some funds may have specific exemptions, so it’s worth consulting an expert to avoid surprises.

For more information, please read our article on How to Avoid Death Tax on Superannuation.

How to Avoid Capital Gains Tax on Inherited Property: Expert Tax Advice

Navigating capital gains tax on an inherited property can be challenging, particularly during an emotionally difficult time. However, understanding the rules, exemptions, and strategies available can significantly ease the process and help reduce tax liabilities. Key provisions like the two-year rule, main residence exemptions, and partial concessions can be crucial in minimising or avoiding CGT altogether. Consulting a professional advisor helps you make informed, legal decisions that suit your unique circumstances.

If you need help understanding estate planning and minimising your capital gains tax, don’t hesitate to reach out to our team at Darcy Accounting and Taxation. You can fill out a contact form or call us on 1300 728 875.