There’s a video doing the rounds claiming that leaving your home to your kids in your will is a “huge mistake” because of capital gains tax (CGT). If your adult children still live in the family home, you may have watched it with a knot in your stomach.
Here’s the reassuring part. In Australia, capital gains tax on an inherited house is often zero when it passes to children who already live in it. In this guide, you’ll learn how the main residence exemption works for a deceased estate, whether the two-year rule applies, and the five details that decide whether your family pays tax when the house is eventually sold.
Do you have to sell an inherited house within 2 years?
Not if the beneficiary lives there. Most people have heard you must sell an inherited property within two years to avoid capital gains tax. That’s one way to get the exemption, but it isn’t the only one.
The other way is for the home to keep being someone’s home. If the beneficiary who inherits it lives there as their main residence from the date of death until they sell, the sale is fully exempt under the ATO’s inherited property rules. There’s no time limit at all.
That means if Mum passes away and her two sons inherit the house they already live in, they could stay for 10 or 20 years, sell, and pay no CGT. Death itself also doesn’t trigger CGT, so there’s no tax when the house passes to them either.
What if only some of the siblings live in the inherited home?
When several children inherit, the ATO looks at each person’s share separately. Living there works for the people who actually live there, not for the whole family.
Say three siblings each inherit one third. Two have lived in the house for years; the third owns a place across town. The two who stay get the full exemption on their shares, however long they hold them.
The third sibling needs their share sold within two years of the death to be fully exempt. The ATO can extend that period in some cases, such as probate delays or a dispute over the will. Miss it, and they get a partial exemption. Only the growth after the date of death is exposed, because their cost base is the home’s market value on that date. A valuation at the time of death is worth getting.
What happens if a child moves out and rents the house?
The exemption depends on the home being the beneficiary’s main residence the whole way from the date of death to the sale. Life changes, though, and kids move out.
If a child moves out and rents the home, apportionment can start. The absence rule may help, that means a former main residence can keep its status for up to six years while it’s rented out. That only works if they don’t treat another property as their main residence over the same period.
Can a child who owns their own home claim the exemption?
A person generally can’t claim two homes as their main residence at the same time. If one of your children already owns a home and treats that as their main residence, they can’t also claim the inherited house.
For that child, the two-year sale window is usually the path to a full exemption.
Is buying out a sibling’s share CGT-free?
It’s common for the sibling who lives in the home to buy out the others. That can work well, but the share they buy isn’t inherited. It’s a new acquisition at the price they pay.
The purchased portion needs its own main residence status from the buyout date to be exempt later. If the buyer keeps living there, that’s usually straightforward. If they plan to rent it out, factor in the CGT on that slice, plus stamp duty and lending costs on the buyout itself.
What did the parent’s home need to qualify?
The exemption starts with the parent. The home must have been their main residence just before death and not used to earn income. Homes bought before 20 September 1985 are treated more generously.
This is where family arrangements matter. Adult kids paying a modest amount of board towards groceries and bills usually doesn’t cause a problem. Kids paying full market rent under a formal arrangement can mean the home was producing income, which can reduce the exemption.
If a parent moved into aged care before passing, the home can often still count as their main residence. It’s worth checking whether it was rented out while they were away.
Should you leave the family home in your will?
For kids already living in the family home, leaving it through the will tends to work well for CGT. The harder questions are about people.
• Who stays? Is the home left to everyone equally, or to the child who lives there, with other assets balancing it out?
• What if someone wants out? Agreeing buyout terms and timing now avoids pressure on siblings later.
• Could the will be challenged? A home held in the estate can be the subject of a family provision claim, so clear wording and fair treatment matter.
Common questions about capital gains tax on an inherited house
Is there capital gains tax when you inherit a house in Australia? No. Death isn’t a CGT event, so no tax is payable when the house passes to the executor or beneficiaries. CGT only comes into play when the property is later sold.
Does the two-year rule mean you have to sell? No. Selling within two years of death (measured to settlement) is one route to a full exemption. The other is the house being the beneficiary’s main residence from death until sale, with no time limit.
Can the two-year period be extended? Yes. The ATO can extend it where the sale is delayed by circumstances outside your control, such as a will dispute or a complicated estate.
What if the house is rented out after Mum or Dad dies? If it isn’t sold within two years and nobody lives in it as their main residence, a partial exemption usually applies. Only the growth after the date of death is taxed, because the cost base is the market value at death.
Does it matter if the parent was in aged care? Often not. The home can usually still count as their main residence while they were in care, but renting it out during that time can affect the result.
Your next step
If you have adult children living at home, write down who you’d want to keep the house and how the others would be treated fairly. Then talk it through with your estate planning lawyer and adviser, so your will reflects the plan and the tax outcome is what you expect.
Passing on the family home is about more than a tax rule. With a little planning, the people who call it home can keep doing so, and the rest of the family can feel the outcome is fair. Helping you achieve your goals, now and for the next generation.
At Inspired Money we have estate planning experts and legal partnership that makes answering these questions easy, and solutions even easier, book a meeting with one of the team today!
This article contains general information only and does not take into account your personal financial situation or needs. Tax outcomes depend on individual circumstances. Before acting on this information, consider whether it’s appropriate for you and seek advice from a licensed financial adviser and a registered tax agent.
