Special rules may apply to disregard a capital gain or loss a taxpayer makes in relation to a main residence acquired from a deceased estate.
These rules apply where:
- the taxpayer is an individual, and
- the ownership interest of the main residence passed to the taxpayer as a beneficiary in, or the taxpayer owned it as the trustee of, a deceased estate.
A taxpayer who acquires a dwelling as a surviving joint tenant is treated as having acquired the dwelling as beneficiary of a deceased estate.
Full exemption for dwellings acquired by the deceased prior to 20 September 1985
A full exemption is available if the dwelling was acquired by the deceased prior to 20 September 1985 (pre-CGT) and the taxpayer’s ownership interest1 ceased within two years' of the deceased's death.
If the dwelling was not disposed of within two years, a full exemption may still be available if the dwelling was the main residence of either:
- the individual the ownership interest passed to as beneficiary of a deceased estate (ie the taxpayer)
- the deceased’s spouse
- an individual with occupancy rights under the deceased’s will from the time of the deceased’s death until the taxpayer disposes of it.
Peter bought a home prior to 20 September 1985. When Peter died in February 2002 the home was passed to his beneficiary, Bill.
Under Peter's will, Pauline had a right to occupy the home which she used as her main residence from the time of Peter's death until Bill disposed of it in March 2018. Pauline did not have an ownership interest in any other dwelling. As such the dwelling is treated as her main residence during this period.
Bill will be entitled to a full exemption.
Full exemption for dwellings acquired by the deceased on or after 20 September 1985
In addition to the requirements for pre-CGT assets, stricter tests apply for dwellings acquired by the deceased on or after 20 September 1985 (post-CGT). In particular, for dwellings that passed to a beneficiary or trustee after 20 August 1996, in the period just before the deceased’s death, the property must:
- have been the deceased’s main residence, and
- not have been used at this time for producing assessable income
For dwellings acquired by the beneficiary or trustee on or before 20 August 1996, there are additional requirements for a full exemption. The deceased must:
- have used the dwelling as their main residence from the date they acquired it until their death; and
- not used it to produce income.
Roger was the sole occupant of a home he bought in April 2000. He did not live in or own another home.
He died in January 2018 and left the house to his son, James, who rented out the house and then disposed of it 15 months after his father died.
James is entitled to a full exemption as he acquired the house after 20 August 1996 and disposed of it within two years of his father’s death.
If a taxpayer does not qualify for a full exemption, they may still be entitled to a partial exemption.
In such a case, the capital gain or loss is apportioned by working out the number of 'non-main residence days' as compared to 'total ownership days'.
Non-main residence days
Broadly, for a pre-CGT dwelling, this is the number of days from the death of the deceased until the taxpayer sells the dwelling, when the dwelling was not the main residence. For a post-CGT dwelling, this period is extended by the number of days during the deceased’s ownership period when the dwelling was not their main residence.
Total ownership days
Broadly, for a pre-CGT dwelling, this is the number of days from the deceased’s death until the taxpayer sells the dwelling. For a post-CGT dwelling, this is the number of days from when the deceased acquired the dwelling until the taxpayer disposes of it.
Vanessa bought a house on 12 February 2007 which she used solely as a rental property. When she died on 17 November 2010, the house became the main residence of her beneficiary, Lisa, who sold the property on 27 November 2017.
As Vanessa had never used the property as her main residence, Lisa cannot claim the full exemption. However, as Lisa used the house as her main residence, she is entitled to a partial exemption.
Vanessa owned the house for 1,375 days. Since she did not treat the home as her main residence for this entire period, it will form the ‘non-main residence days’. Lisa then lived in the house for 2567 days, treating it as her main residence for all of this time.
The total ownership for both Vanessa and Lisa is a period of 3,941 days (1,375 + 2,567).
Assuming Lisa made a capital gain of $100,000, the taxable portion is calculated as follows:
= Capital gain x (non-main residence days/total ownership days)
= $100,000 x (1,375/3,941)
Note that the apportionment formula may be adjusted where a dwelling is inherited from someone who had previously acquired the dwelling by inheritance.