New ATO Guidance on Inherited Homes: What Families Should Know

The Australian Taxation Office (ATO) recently released updated guidance (TD 2026/D1) clarifying how capital gains tax (CGT) rules apply to inherited homes.

This isn’t a new tax. However, the guidance highlights how existing rules may be applied in situations where families inherit property and decide to keep it rather than sell it.

As the family home is often the largest asset within an estate, understanding these rules can help families make more informed decisions about how and when to deal with inherited property.

The Main Residence Exemption

In Australia there is generally no tax payable on the sale of the main residence. However, CGT may apply when inherited assets are eventually sold.

A key rule that may apply to inherited homes is the main residence exemption. If the conditions are met, the property can be sold without triggering capital gains tax.

Whether this exemption applies will depend on a number of factors, including how the property was used before and after the owner passed away.

The Importance of the Two-Year Rule

One of the simplest ways the exemption can apply is through the two-year rule.

If the property was the deceased person’s main residence and was not used to produce income at the time of their death, the property can generally be sold within two years without CGT applying.

This rule allows executors and beneficiaries time to finalise the estate and decide whether to sell the property.

In some cases, the ATO may allow extensions where delays are outside the family’s control, such as legal disputes or complex estate administration.

Keeping the Property

Many families choose to hold onto an inherited property rather than sell it immediately.

This might be for sentimental reasons, to allow a family member to live in the home, or to keep it as an investment.

However, the ATO’s guidance reminds families that the full CGT exemption does not always continue indefinitely once the two-year period has passed.

To maintain the exemption in some cases, the property may need to become the main residence of an eligible person, such as a surviving spouse or a beneficiary with a right to occupy the home under the will.

When Partial CGT May Apply

Even if the full exemption is not available, a partial CGT exemption may still apply.

For example, this may occur where the property was rented for part of the ownership period or where it was not always used as the deceased person’s main residence.

In these situations, the capital gain may be apportioned based on the period the property was not treated as a main residence.

Why Planning Matters

The recent update reinforces the importance of thinking carefully about inherited property before making long-term decisions.

Questions families may wish to consider include:

• Whether the property should be sold within the two-year exemption window
• Whether a beneficiary intends to live in the home
• Whether the property will become an investment property
• How the property fits within the family’s broader estate and financial planning strategy

These decisions can influence both the tax outcome and the amount of wealth ultimately passed to the next generation.

Our Perspective

From a financial planning perspective, inherited property is rarely just a tax issue.

It often sits at the intersection of estate planning, investment strategy and family decision-making.

Taking the time to review the situation early can help ensure that decisions around keeping or selling an inherited home align with the family’s long-term financial goals.

Where there is the potential for the main residence to be retained for longer than two years, a formal property valuation at the date of death should be considered. This will lock in the value of the property at that date and could be important where a partial CGT liability is payable. 

Why not take the next step and talk to a qualified and highly experienced financial planner today?

LifeTime Financial Group are specialist (holding appropriate accreditations) financial planners who are ideally positioned to work with you in planning and managing Estate needs. Based in the Brighton in Melbourne's bayside area, we are ideally located with easy parking and proximity to everything the basyide area has to offer.

If you would like to discuss your current position or wider financial planning needs, why not call us today on 03 9596-7733? There is no cost or obligation for our initial conversation/meeting.

LifeTime Financial Group. A leading privately owned Melbourne-based Financial Planning practice with no ties to any financial institution.

Sources

Australian Taxation Office – Inherited assets and capital gains tax
Australian Taxation Office – Inherited property and CGT
Australian Taxation Office – Extensions to the two-year ownership period
ATO Draft Determination on inherited homes and the main residence exemption (2026)