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Inheritance of the Main Residence CGT Exemption Options Before & After 2 Years

by | Oct 23, 2022 | Capital Gains, Property Advice, Property Estate

When the deceased person’s home has a mixed history of being a principal home and a rental, combined with the fact the estate sells the otherwise principal home after 2 years, the CGT is not so easy to understand for the family left to deal with how and if CGT is applicable?

What is generally understood

Decease’s main residence is exempt from CGT for beneficiaries if settled within 2 Years of the date of death S 118-195 ITAA 1997

The estate can apply for an extension of 2 years, see PCG 2019/5

What is not

After 2 Years exemption period, the beneficiaries can only get a partial CGT exemption S 118-120 ITAA 1997

If the property is also rented during the 2-year period.

What is hard to understand

How to calculate the Partial GST Exemption under S118-200 ITAA 1997

Main Residence Inheritance

What if the fair market value has dropped insignificantly?

What if the fair market value (FMV) has insignificantly dropped inside the 2-year period, if they wait, the beneficiaries will have CGT to consider, against any potential increase in value

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What is Generally Understood!

2 Years Main Residence Exemption S 118-195 ITAA

  • Decease’s main residence is exempt from any CGT to the beneficiaries under S 118-195 ITAA 1997 if
  • Was the deceased main residence just before the time of death?

What is not generally understood?

When the deceased treated their home as their main residence just before death, also had a history of being rented for periods, which were not also covered by any 6-year PPOR exemptions.

 (The fact the property may have been a rental property at various stages during the ownership period)- see also S 118-190(3) ITAA 1997, will still be exempt for CGT  

What is hard to understand!

Partial CGT Exemption after 2 Years S 118-200 ITAA 1997

If the deceased main residence is sold after the 2 years, and no extension is sought from the ATO for exceptional circumstances (see PCG 2019/5), then S 118-200 ITAA 1997 allows for the calculation of a partial exemption as follows: –

Elements to considering

  • Decease Purchase Price (the cost base) of the Main Residence
  • The total number of days the property was held (from the original purchase to the final date of the contract of sale by the estate/beneficiaries)
  • The number of days the property was not the deceased PPOR
    • This will include any period between the original purchase date by the deceased, and the date of death, that the home was renting or not being considered otherwise the deceased PPOR, which is otherwise ignored if the property is settled within the 2-year period from the date of death, again see S118-190(3) as referring to in TD 1999/70.
    • Also, the days after the date of death to the date of the contract.

Partial CGT Exemption after 2 Years S 118-200 ITAA 1997

PS LA 2008/4

You calculate your capital gain or capital loss using the formula:

A capital gain or capital loss amountxNon-main residence days / Total days

The capital gain or capital loss is the amount made from the disposal of the dwelling (before applying for any main residence exemption).

The non-main residence days are the sum of:

(a) if the deceased acquired the ownership interest on or after 20 September 1985 – the number of days in the deceased’s ownership period when the dwelling was not the deceased’s main residence; and

(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of one of the following:

● a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)

● an individual who had a right to occupy the dwelling under the deceased’s will, or

● you, as a beneficiary if you disposed of the dwelling as a beneficiary.

Total days is:

(a) if the deceased acquired the ownership interest before 20 September 1985, the number of days from the deceased’s death until you disposed of your ownership interest; or

(b) if the deceased acquired the ownership interest on or 20 September 1985 – the number of days in the period from the acquisition of the dwelling by the deceased until you disposed of your ownership interest.


If the deceased main residence is sold after the 2 years, and no extension is sought from the ATO for exceptional circumstances (see PCG 2019/5), then S 118-200 ITAA 1997 allows for the calculation of a partial exemption as follows: –

A recent client example.

A client’s mother passed away on the 1st of December 2021, leaving her PPOR to the estate, which is shared by 3 sons, one being our client.

The ceased mother always treated the home as her principal place of residence, except for a period of 5 years when she rented the property while claiming another property as her PPOR.

The sons are concerned that the fair market value at the time of the mother’s death was $1.8m, and has now potentially dropped to $1.5m due to the recent downturn post the covid-19 property boom.

The question asked by the son is – We are concerned if we sell now, we will not get a fair value for our deceased mother’s home to share during the next 2 years, however, if we wait for the market to turn, we may expect $2M in say 3 years’ time. Can you help us understand the CGT Tax considerations?

The client’s facts to consider for CGT Partial PPOR Exemption – if settled after 2 years.

Purchase Price

  • $520,000             15/06/2005 (the cost base of the deceased)
  • Date of death     01/012/2021
  • Fair Market Value at Death          $,1800,000
  • The 2 Year Period, post-death 1st December 2021 to 30th November 2023
  • If sold now or within the 2-year window expect $1.55M
  • I wait 3 years expecting $2M, the date used for exercise is 15th November 2024
  • What are the tax consequences of waiting to get a better price in 3 years?

Sell within the 2 years (CGT PPOR- Get Full Exemption)

  • $1.55m
  • Beneficiaries will benefit from the deceased mother’s PPOR exemption at the date of death
  • CGT Exemption – no CGT 😊
  • Though the FMV was $1.8m at the date of death, they now would get $250,000 less, ($1.8M -$1.55M (however CGT Exempt.

Sell at 3 Years (CCG Partial Exemption)

  • $2.0m proposed sale price if they wait for the market to pick up.
  • Total days held by the deceased mother until the date of death
    • 15/06/2005 to 01/12/2021 – 6013 days
    •  than during the 2 years after death 30th November 2023 – 730 days
    • 30th November 2023 to 15th November 2024 – 351 days
    • Overall days 7,093 days
  • PPOR days not the deceased PPOR
    • 5 years @365 days – 1,825 days (the mother rented the home back in 2010 for 5 years while living in another home as her PPOR, before returning to take up the home again as her PPOR).
  • The original Cost base of purchase is now used for any CGT calculation, not the Fair Market Value at the date of death.
    • $520,000

Capital Gain Calculation

               $2,000,000 – $520,000 = $1,480,000

Partial Exemption

               $1,480,000 @ (1825 days (5 years rented previously) + 730 days (2 years post the date of death) + 351 days post the 2 years period / (total overall days held)

7,093 days

               $1,480,000 @ (1825 +730 + 351 days) / 7,093 days

$1,480,000 @ 0.4097

               $606,356

               50% discount $303,178 Capital Gains Tax

Net After CGT

$2,000,000 less CGT $303,178 = $1,669,822

Points to Consider –

  • The longer the period over 2 years post-date of death of the deceased
  • And the higher the gain over the deceased original cost base
  • It may be less advantageous to trade the fully CGT Main Residence Exemption Against the exposure to the Partial Exemption based on the decease original cost base in pursuit of high sale prices.

In this example, it could be more trouble than it is worth to wait when the son will have to contend with applying only a partial CGT discount on their late mother’s home.

The need to investigate the history of the late mother’s home, instead of just accepting it as per PPOR just before the time of death.

Greater risk of ATO Audit if the property is sold outside the 2 years to ensure the beneficiaries have taken due consideration of the property’s history and the calculation to apply for the partial CGT exemption correctly.

Let alone the holding costs, and the opportunity cost of having this amount of funds not available to the sons for investing elsewhere.

Tax Tip

Note, if the home was sold within the 2 years, the fact the home was not the mother’s PPOR for 5 years does not need to be considered, if the home was otherwise the mother’s PPOR at the time of death. S118-190 (4

Need Help

If you would like any help or advice regarding the tax affairs of a deceased estate, please contact our office.

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