• Inheriting a property doesn’t mean you’ll be taxed right away. Capital gains tax on property only applies when you decide to sell. And the amount depends on things like when the property was bought, how it was used, and when it’s sold.

• A professional valuation helps set an accurate cost base and makes sure your capital gains tax meets the ATO rules.

• You may qualify for a full or partial CGT exemption depending on your situation which could help you reduce your tax.

Inheriting a home or property can be a bittersweet experience. Receiving such a meaningful gift from someone you loved can feel rewarding, but it can also be an overwhelming financial commitment in navigating your tax responsibilities especially if you’re a new investor and how the rules on capital gains tax apply to your property.

We often find many Australians asking themselves these questions:

• When does capital gains tax apply?

• Do I need to pay capital gains tax if I’ve just inherited our family home?

• How do I know if I’m calculating it correctly? 

The unfamiliarity and confusion on property tax and its implications will change once you become familiar with the requirements so that you can plan to maximise your investment with minimal stress and anxiety.

That’s why we’ve put together this guide to help you make confident decisions in managing your inherited property, especially if you’ll be selling it later on. From knowing the basics of capital gains tax on property, what the ATO expects from you as the beneficiary, and how to make sure you’re valuing your property correctly from the start.

Understanding Capital Gains Tax on Inherited Property

Even though Australia doesn’t have an inheritance tax, once you decide to sell your inherited property, it can trigger capital gains or losses (depending on the sale price). 

Capital gains tax (CGT) is a type of property tax which is applied when you sell a property for more than what it originally cost. And in the case of inherited properties, that original cost isn’t what your loved one paid. It’s the market value at the time you received the property (often at their passing), which is called the ‘cost base’.

The good news? You don’t need to pay capital gains tax right away. The CGT event, the point when tax may apply, will only occur once you sell the property. So if you decide to keep and live in the family home or even hold it for investment, you won’t get an immediate tax bill.

However, when you sell it, capital gains tax on inherited property may apply, and calculating your CGT liability wouldn’t be that simple.

Does Capital Gains Tax Apply to Inherited Property?

One of the most common questions we hear people ask after inheriting their family home is, “Do I need to pay tax on it?” The short answer is no, not right away.

You’ll only need to deal with capital gains tax on inherited property once you decide to sell. The Australian Taxation Office (ATO) looks at several factors to determine whether CGT applies and how much you might owe:

• How the property was used before you inherited it. Was it your loved one’s main home? Or was it rented out as an investment property?

• When the property was purchased. If your loved one bought it before 20 September 1985 (when CGT was introduced in Australia), it may be exempt from CGT.

• How long you’ve kept the property. If you sell it within two years of inheriting it, you may be able to claim a full CGT exemption under the two-year rule.

It sounds simple enough. But calculating capital gains tax on property can get tricky, especially when you’re unsure about the property’s market value or the right cost base to use.

That’s why understanding your property’s history and use is so important, because even small details can affect whether you pay tax or not.

This is where a professional and independent property valuation becomes crucial. A qualified valuer helps establish your property’s accurate market value at the date of death, making sure your CGT calculation is correct and complies with ATO rules. This not only helps you avoid overpaying tax but also protects you from potential audit issues later on.

ATO Rules on Capital Gains Tax on Property That You’ve Inherited

The ATO clarifies how to properly work out your cost base when calculating your capital gains tax on property. And this often comes down to when your loved one bought the property and how it was used before you received it.

1. If your loved one bought the property before 20 September 1985 (Pre-CGT assets)

If the property was purchased before this date, it’s generally exempt from capital gains tax, unless major improvements were made after that time. In that case, the cost base (or starting value) to calculate your capital gains would be the market value on the date of their death.

2. If your loved one bought the property after 20 September 1985 (Post-CGT assets)

If your loved one purchased the property after CGT began, and it was their main residence (not rented out), the property may qualify for a full CGT exemption, as long as it wasn’t producing income at the time of their death.

3. If the inherited property was used to earn income (Rental or investment property)

If the property was rented out or used as an investment, you may get a partial CGT exemption. This means you’ll only pay CGT for the period it was used to generate income.

These rules can be complex, and a small miscalculation can lead you to pay too much CGT or face some compliance issues with the ATO later. That’s why having a professional, independent valuer is essential. They help make sure your baseline tax calculations are accurate while keeping your tax filing fully compliant with ATO standards.

How to Calculate Capital Gains Tax on Inherited Property

If it’s your first time working out your capital gains tax on property, you might find the process overwhelming. So we recommend you to use the ATO’s capital gains tax tool to get a reliable estimate of how much CGT you need to pay. This should be confirmed by your accountant.

Simply put, CGT is the tax you pay for the profit you make when you sell a property. For inherited properties, that profit comes from the difference between your property’s market value (from when you inherited it) and the price you sold it for.

Here’s a quick guide to work out your CGT:

1. Determine the acquisition date

For inherited homes, this is often the original owner’s date of death, even if you received the property later.

2. Get a professional valuation to establish the property’s market value

You’ll need to know what the property was worth at the time of death. The best way to establish your cost base and calculate CGT correctly is by partnering with an accredited property valuer.

3. Compute your capital gain or loss

When you sell the property, subtract the cost base (market value at death plus other costs) from the selling price.

4. Apply exemptions or discounts

If you sell the inherited property within two years of the date of death of the original owner, you may qualify for a full CGT exemption. You might also be eligible for the 50% CGT discount if you’ve held the property for more than 12 months.

FAQs: Capital Gains Tax on Property

1. When do you pay capital gains tax on property?

When you sell a property for more than its cost base (original purchase price), you need to pay capital gains tax (CGT). For inherited properties, CGT only applies when you sell the property, not when you inherit it. The key moment that triggers CGT is the sale (or disposal) of the property.

2. Who pays capital gains tax on property?

The person who owns and sells the property is responsible for paying CGT. This can be an individual, a company, or a trust. If you’ve inherited a property, you’ll be the one responsible for CGT when you eventually decide to sell it.

3. How much capital gains tax on property do you need to pay?

The amount you’ll pay depends on a few factors like:

• How long you’ve owned the property (you may get a 50% discount if you’ve held it for over 12 months)
• The property’s cost base (usually its market value when you inherited or purchased it)
• Your taxable income for the year you sell the property

Because everyone’s situation is different, getting a professional property valuation is key to ensuring your accountant uses the correct cost base so that the calculations are accurate and compliant with ATO guidelines.

4. Can you avoid capital gains tax on property?

In some cases, yes, especially if the property was your main residence or you sell it within two years of inheriting it. This two-year rule can make your property fully exempt from CGT. You may also qualify for other exemptions depending on how the property was used before and after you inherited it.

At Independent Property Valuations (IPV), we help you determine the accurate market value of your property. So you can calculate and manage your capital gains tax confidently and correctly.

Final Thoughts

Sorting out your capital gains tax on property can feel overwhelming especially when you’re also carrying the emotional weight of managing your family home. Between figuring out your cost base, checking the possible exemptions, and keeping up with the ATO rules, it’s easy to feel unsure about where to start.

At Independent Property Valuations (IPV), our experienced valuers give you a clear picture of your property’s true market value, which is the key starting point for calculating CGT correctly. So whether you’re preparing to sell your inherited home, reviewing your investment portfolio, or just want peace of mind about your property’s worth, our expert team is here to guide you through it with clear and accurate valuations you can rely on.

Let’s make sure your inherited property is valued correctly.

Reach out to our team of accredited valuers today to help you calculate your capital gains tax on property so you only pay what’s necessary.

*This article is for general informational purposes only and does not constitute legal, financial, or taxation advice. For personalised advice, please consult a qualified accountant, tax advisor, or the Australian Taxation Office.