Inheriting property from parents in Australia: what you need to know

Inheriting property is a significant moment that often carries emotional and financial implications.

Whether it’s a family home or investment property, understanding your obligations, particularly around capital gains tax (CGT), is essential.

In this blog, our wills and estate lawyers will:

• Break down the key considerations,

• Explain how CGT applies to inherited properties, and

• Offers strategies to minimise your tax obligations while navigating the process with ease.

What is capital gains tax? Does it apply to inherited property?

Capital gains tax (CGT) is a tax applied to the profit made from selling an asset. 

When it comes to an inherited asset like a property, CGT rules in Australia are nuanced. Whether or not you need to pay CGT depends on factors like:

• When the property was purchased,

• How it has been used, and

• Your actions as the beneficiary.

If your parents bought the property before 20 September 1985 (when CGT was introduced), it’s generally exempt. For properties purchased after this date, CGT may apply if you sell the property.

However, exemptions such as the principal place of residence rule may help reduce your tax obligations.

Estate planning is key to managing CGT and ensuring your family’s wishes are honoured. Learn more about the differences between a will and estate planning here.

Do you pay capital gains on an inherited property in Australia?

Whether you need to pay capital gains tax (CGT) on inherited property depends on several factors. One main consideration is what you choose to do with the property. If you decide to sell it, you may need to pay CGT, but there are situations where exemptions apply.

For example, if the property was your parents’ main residence and it remains your principal place of residence, you might avoid CGT altogether.

However, if the property was an investment or rental property, the tax implications may be different.

Understanding the property’s history and how CGT rules apply can help you make informed decisions.

Factors that may influence capital gains tax on inherited property

Property type

Whether the property was a primary residence, holiday home, or investment property can impact your CGT obligations. A primary residence often qualifies for an exemption, while investment properties may not.

How long you hold the property

Are you considering selling the property shortly after inheriting it? You might avoid CGT entirely under specific exemptions, such as the two-year sale rule for main residences. 

Holding onto it for longer could lead to CGT based on the increase in its value over time.

Your intended use of the property

Living in the property as your principal place of residence might allow you to claim a CGT exemption. Alternatively, using it as a rental or selling it for profit may result in tax obligations.

The property’s value at inheritance

The property’s value is used to calculate any capital gain or loss if it’s later sold. Understanding this baseline is key to planning for potential taxes.

How to avoid capital gains tax on inherited property

Minimising or avoiding capital gains tax (CGT) on inherited property can depend on your specific circumstances. Below are some strategies you may consider.

1. Sell the property within two years

If the home was your parents' main residence, selling within two years of inheritance may exempt you from CGT. This is a common strategy, but the exemption depends on meeting specific criteria.

2. Use the property as your main residence

Moving into the property and making it your principal place of residence can reduce or eliminate CGT. This approach may be beneficial if you plan to hold onto the property for the long term.

Related: Concerned about safeguarding the property for your children? Our blog on protecting your child’s inheritance offers practical strategies.

3. Understand the exemptions for pre-1985 properties

If your parents purchased the property before 20 September 1985, it is likely exempt from CGT.

However, this exemption may not apply to significant renovations or other factors, so professional advice is key.

4. Seek professional advice

Every inheritance situation is unique. Engaging an estate lawyer can help you understand your obligations and plan effectively to minimise costs.

Who pays capital gains tax on a deceased estate?

The responsibility for paying capital gains tax (CGT) on a deceased estate varies depending on how the property is handled. In most cases, CGT is not triggered at the time of inheritance itself. However, it may arise later when the property is sold.

• If the executor sells the property: The estate may be liable for CGT. The executor needs to ensure that the tax is calculated and paid as part of the estate’s administration.

• If the property is transferred to beneficiaries: Once it’s in your name, a future sale could trigger CGT. You would then be responsible for reporting and paying the tax.

• When there are multiple beneficiaries: Is the property shared among siblings or other heirs? CGT obligations may be divided based on each person’s share of the property.

Understanding who is responsible for CGT and when it applies can help you plan and avoid unexpected costs. It’s best to consult with an experienced estate lawyer to navigate these complexities.

Related: Worried about protecting your property for future generations? Discover how to protect your child’s inheritance from their spouse.

Need professional advice navigating the confusing waters of inheritance?

Inheriting property comes with a mix of emotions and responsibilities.

Estate lawyers play a crucial role in helping you navigate this complex process. We will ensure your legal and financial obligations are managed smoothly. Direct Lawyers will help you:

Understand your legal responsibilities

Whether you're an executor or a beneficiary, we can clarify your obligations and help you make informed decisions. We’re here to help you understand how to handle the property and address any claims against the estate.

Manage probate and title transfers

Our team guides you through the probate process and assists with transferring the property title into your name. We’ll ensure everything is done correctly and efficiently.

Minimise capital gains tax

Estate lawyers are skilled at identifying strategies to help you reduce or avoid capital gains tax on inherited property. From advising on exemptions to guiding you through complex rules, we ensure you’re making the most informed choices.

Take the stress out of inheriting property with expert lawyers by your side

Inheriting property can be both a privilege and a challenge, especially when navigating the legal and financial complexities involved. With the right guidance, you can make informed decisions and ensure the process is as smooth as possible.

If you need support with probate, property transfers, or understanding your obligations, contact Direct Lawyers today.

Request your FREE 15-minute consultation to get the conversation started.