Navigating a Deceased Estate: Avoiding Property Capital Gains Tax Mistakes
Losing a loved one is difficult. This practical guide explains deceased estate tax rules in plain English—helping families avoid costly CGT mistakes and unnecessary stress.
Managing a deceased estate can feel overwhelming. You’re dealing with grief, legal paperwork, and tax obligations—often all at once. Among the most confusing and costly areas is Capital Gains Tax (CGT). Simple errors can lead to avoidable tax bills that eat into beneficiaries’ inheritances.
This blog post breaks everything down clearly, with real-world examples, comparison tables, and a visual flowchart to help you understand the process from start to finish.
What Exactly Is a Deceased Estate?
A deceased estate includes everything a person owned at the time of their death—property, bank accounts, investments, and personal assets. For tax purposes, the estate operates as a trust during administration.
Who Manages the Estate?
The key decision-maker is the Legal Personal Representative (LPR):
- The Executor (named in the will), after obtaining probate, or
- The Administrator (appointed by the Court) if there is no will.
Important: A solicitor is not automatically the LPR unless they are named as executor or appointed as administrator.
The LPR is also the estate’s trustee during administration.
First Step: Notifying the ATO
You can notify the ATO of the death using the Notification of a Deceased Person form. However, you will only be granted full authority (including access to tax records) once you provide probate or letters of administration.
Your Responsibilities as LPR
The LPR must:
- Finalise the deceased’s outstanding tax affairs.
- Lodge estate tax returns where required.
- Pay tax liabilities before distributing assets.
Distributing assets too early can result in personal liability if later tax debts arise.
Two Separate Tax Returns You May Need to Lodge
1. Date of Death Return
Covers income earned by the deceased from 1 July to the date of death.
2. Estate Tax Return (Trust Return)
Covers income earned by the estate from the day after death.
The estate requires its own Tax File Number (TFN).
The 3-Year Tax Concession Rule
For the first three income years, the estate is taxed at individual rates, including the tax-free threshold.
From year four onward:
- The estate is taxed at special trust rates, and
- Only the first $416 is tax‑free.
No extensions apply to this concession.
Understanding Capital Gains Tax on Estate Assets
Quick Summary: Most assets pass tax‑free at death via rollover, but future sales may trigger CGT depending on cost base, main‑residence status, and timing.
Does a Death Trigger CGT?
Generally, no. Assets transfer to the LPR or beneficiaries under a CGT rollover.
A rare exception is CGT event K3, which applies only when assets pass to tax‑advantaged or tax‑exempt entities (such as charities)—it does not apply when assets pass to individuals. (for tax‑exempt beneficiaries).
Determining Cost Base — The Most Important Step
Quick Summary: Cost base is the foundation of every CGT calculation. Correct records and valuations are crucial.
The cost base determines the capital gain or loss when an inherited asset is eventually sold. The LPR must make reasonable efforts to obtain or reconstruct records. If documentation is missing, statutory declarations, conveyancer files, or historical bank statements may be necessary.
Date‑of‑death valuations: For pre‑CGT assets or market‑value resets, the valuation should be prepared by a qualified valuer or real estate professional with evidence supporting the value. the capital gain or loss when an inherited asset is eventually sold.
A. Pre‑CGT Assets (Acquired Before 20 September 1985)
These were CGT‑exempt for the deceased, but:
- They become post‑CGT assets for the beneficiary.
- The cost base resets to market value at the date of death.
Ownership Structure Matters
Joint Tenants
- The deceased’s share passes automatically to the surviving joint tenant.
- The cost base of the inherited share becomes its market value at death.
Tenants in Common
- The deceased’s share passes to the estate or beneficiary.
- Cost base is the market value at death.
B. Post‑CGT Assets
Generally, the beneficiary inherits the deceased’s original cost base, including:
- Purchase price
- Stamp duty
- Improvement costs
Main Residence Exception (Very Important)
If the home was:
- The deceased’s primary residence, and
- Not producing income at death,
…the cost base becomes market value at date of death, even if it was a post‑CGT property.
The 2‑Year Rule for Selling the Main Residence
Quick Summary: Settlement must occur within two years for full CGT exemption, unless safe harbour applies. Income‑producing use at death prevents full exemption.
The sale of a deceased’s primary residence can be CGT‑free if settlement occurs within 2 years of death.
CGT event A1 happens at settlement, not contract.
The ATO may allow an extra 18 months under safe‑harbour rules if delays were outside your control.
The 6‑Year Absence Rule
Quick Summary: This rule helps maintain main‑residence status for the deceased, but does not automatically entitle beneficiaries to a market‑value reset unless the property was not producing income at death.
A property can still qualify as the deceased’s primary residence if:
- It was vacant (no time limit), or
- It was rented (up to 6 years).
However, only properties not producing income at the date of death qualify for a market‑value cost‑base reset.
Stamp Duty on Inherited Property
Quick Summary: Transfers made exactly as the will directs are usually exempt. Any deviation may trigger full stamp duty.
Transfers that follow the will exactly (“in conformity with the will”) usually attract nominal duty.
If beneficiaries renegotiate the allocation, the whole stamp duty may apply.
Comparison Table: Was the Property Rented at Death?
| Scenario | Primary Residence at Death? | Producing Income at Death? | Market Value Reset? | Eligible for 2‑Year CGT‑Free Sale? |
|---|---|---|---|---|
| The deceased lived in a home, not rented | ✅ Yes | ❌ No | ✅ Yes | ✅ Yes |
| The deceased lived in a home, partly rented (room) | ⚠️ Partial | ⚠️ Yes | ❌ No | ❌ No |
| The deceased moved to aged care; the home is vacant | ✅ Yes | ❌ No | ✅ Yes | ✅ Yes |
| The deceased moved to aged care, and the property was rented | ⚠️ Main residence via 6‑year rule | ✅ Yes | ❌ No | ❌ No |
| Investment property rented | ❌ No | ✅ Yes | ❌ No | ❌ No |
Additional Example: Safe Harbour Does Rescue the Exemption
4A. Safe Harbour Applies — 2‑Year Rule Extended
Scenario:
- Olivia died on 1 Jan 2022.
- Her main residence was not rented and qualifies as her primary residence at the time of her death.
- Probate is delayed due to a contested will, which was resolved only in June 2023.
- The executor immediately lists the property for sale.
- Contract signed: October 2023.
- Settlement: February 2024 (26 months after death).
Does the 2‑year exemption apply?
Yes — under safe harbour PCG 2019/5, because:
- ???? There was a will dispute delaying administration.
- ???? Executor acted as soon as practicable once the dispute was resolved.
- ???? Property was sold promptly after probate.
CGT outcome:
- Market value at death: $1,200,000.
- Sold for: $1,250,000.
- The full CGT exemption applies even if the asset is sold after 2 years.
Superannuation and Deceased Estates — A Common Misunderstanding
Quick Summary: Superannuation often bypasses the estate entirely unless a binding nomination fails or instructs payment to the estate. Tax treatment depends on the ultimate beneficiary.
Superannuation is not automatically part of the deceased estate.
When Super Does Not Go Through the Estate
Super is controlled by the super fund trustees, not by the will.
It bypasses the estate when:
- A binding death benefit nomination (BDBN) directs who receives the super.
- The trustee exercises discretion to pay dependents directly.
In these cases, the LPR has no authority over the super balance.
When Super Does Form Part of the Estate
Super may be paid to the estate if:
- There is no binding nomination; or
- The nomination is invalid or expired; or
- The trustee decides that the estate is the most appropriate recipient.
Funds paid to the estate become part of estate assets and may:
- Be distributed according to the will, and
- Become relevant for estate tax returns.
Tax on Super Death Benefits
Tax depends on whether the recipient is a tax dependent under tax law:
| Recipient | Tax Treatment |
|---|---|
| Spouse, former spouse, minor child | Generally tax‑free |
| Financial dependant | Tax‑free |
| Adult child (not financially dependent) | Taxable component taxed up to 15% + Medicare |
If the super is paid into the estate:
- The estate receives the tax treatment based on the beneficiary who ultimately receives it.
Example:
- Super death benefit paid to estate = $300,000.
- The beneficiary is an adult, non-dependent child.
- Tax payable = up to $45,000.
Practical Examples
Below are updated practical illustrations, including partial-exemption and market-value-reset comparisons.
1. Pre‑CGT Asset — Market Value Reset
John bought a house in 1980 for $60,000.
John dies in 2024 — market value is $900,000.
Sarah sells in 2025 for $950,000.
- Cost base = $900,000 (market value)
- Capital gain = $50,000
- Discounted gain = $25,000
2. Joint Tenants — Pre‑CGT (Clarified for Main Residence vs Rented Use)
Mary and Tom bought it for $100,000 in 1983 (pre‑CGT).
Tom dies in 2024 — property worth $1.2M.
Mary, as the surviving joint tenant, automatically inherits Tom’s half (valued at $600,000).
Important clarification:
Whether Mary will pay CGT on a later sale depends on how the property was used.
Scenario A — Property Was Their Principal Place of Residence (PPR)
If Mary and Tom lived in the property as their primary residence, and the home:
- Was not producing income at Tom’s death, and
- Mary continues to treat it as her primary residence,
???? Mary can generally claim the full principal residence exemption on sale.
CGT outcome:
- Mary sells the property for $1.3M.
- Because it remained her PPR:
→ No CGT payable on either her original interest or Tom’s inherited half‑interest.
This is the correct outcome if the house was always their home.
Scenario B — Property Was Rented (Not PPR)
If the property was not their primary residence — e.g., it was rented or vacant for investment purposes — Mary cannot claim the principal residence exemption.
Example:
- Property rented at the time of death.
- Mary sells later for $1.3M.
CGT calculation applies only to Tom’s inherited half:
- Proceeds for inherited half: $650,000
- Cost base (market value at death): $600,000
- Capital gain = $50,000 (discount may apply)
Mary’s original half remains pre‑CGT; no CGT applies to her half.
This updated example now correctly distinguishes between:
- An actual PPR situation, where Mary would usually pay no CGT, and
- An investment/rental situation, where CGT applies to Tom’s inherited share.
3. Post‑CGT Main Residence — Tax‑Free Sale
David bought it in 2000 for $400,000.
Primary residence, not rented.
Value at death in 2024 = $1M.
Mark sells 18 months later for $1.05M.
- Cost base = $1M
- Sale within 2 years → No CGT
4. Deceased Property Rented at Time of Death — Sold Within 2 Years (Not Fully Exempt)
Scenario:
- Michael bought a home in 2010 for $500,000.
- He moved to aged care and rented the property for 3 years.
- Michael dies in 2024, and the property remains rented.
- Market value at date of death: $900,000.
- The executor sells the property 14 months later for $930,000.
Why the full exemption does not apply:
- Because the home was being rented at the date of death, it was producing income, so:
- ❌ The market‑value cost‑base reset does NOT apply.
- ❌ The 2‑year full CGT exemption does NOT apply.
- The beneficiary/estate inherits Michael’s original cost base.
Tax outcome:
- Sale price: $930,000
- Cost base: $500,000 (plus improvements, if any)
- Capital gain = $430,000
- A 50% CGT discount may apply, depending on the estate’s holding period.
5. Missed 2‑Year Window Due to Settlement
Death: 1 May 2022
Contract: 15 March 2024
Settlement: 20 June 2024 (after deadline)
Unless safe harbour applies:
- Gain = $850,000 − $800,000 = $50,000
6. 6‑Year Rule but No Reset
Alice bought a property for $450,000.
Moved to aged care and rented it out.
Rented at date of death → no market‑value reset.
Sold later for $950,000:
- Cost base = $450,000
- Gain = $500,000
7. Partial Main Residence Exemption — Apportionment Example
Scenario:
- Property owned for 10 years.
- Rented for 3 years, lived in for 7 years.
- Total gain on sale = $300,000.
Taxable portion:
- 3/10 × $300,000 = $90,000 taxable capital gain.
- 50% discount may apply.
8. Estate Taxable Income — 3‑Year Rule — 3‑Year Rule
The estate earns $30,000 in rental income in Year 1.
Tax at individual rates ≈ $3,142.
Same income in Year 4 taxed at trust rates → over $12,000.
8. Stamp Duty — Not in Conformity Must Pay
Will: Emma & Claire share the estate 50/50.
They decide Emma gets the house ($900k), and Claire receives shares ($900k).
Because this is not in conformity with the will:
- Emma may pay $40k–$50k in stamp duty.
Deceased Estate Property CGT Overview
Person Passes Away
-
Identify the LPR (Executor / Admin)
- Probate / Letters of Administration
- LPR becomes the trustee of the estate.
-
Notify the ATO & Obtain Estate TFN
-
Determine the Estate Assets
- In particular Properties
- Principal Home
- Investment Properties
- Pre-CGT (pre-20th Sept 1985
- Post – CGT
- Main Residence (Special Rules)
-
Determine the Cost Base
- Pre-CGT – Market Value at death
- Post – CGT – Deceased’s cost base
- PPR (not rented) – Market value reset
-
Properties in the Will to be Sold
- Apply the relevant CGT exemptions
- 2 Year Rule
- 6 Year Rule
- Safe Harbour (extra 18mths)
- Partial exemption if rented or retained after 2 years
-
Calculate CGT and lodge Returns each year
Need Help With a Deceased Estate?
Losing a loved one is emotionally exhausting. Dealing with complex tax rules at the same time can feel overwhelming. Getting CGT wrong can result in large, unexpected tax bills and even personal liability for executors.
If you want clarity, reassurance, and expert guidance through this process, professional advice can make all the difference.
- ✔️ Clear CGT and main residence guidance
- ✔️ Accurate cost-base reconstruction
- ✔️ Correct application of exemptions and safe harbour
- ✔️ Estate and trust tax returns handled properly
- ✔️ Support with superannuation death benefits
We’re here to help.
???? Book a consultation 07 304 00 304 or international +61 7 304 00 304
???? https://umbrellaaccountants.com.au/book-appointment/
???? info@umbrellaaccountants.com.auLet’s make sure your loved one’s estate is handled with care, clarity, and confidence.
Please feel free to download our free guide
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