Generally, if you inherit a property from a deceased estate, you may be able to disregard a capital gain or capital loss when you sell it, provided certain conditions are met.
One of the possible conditions (among several alternatives) is that:
From the date of the deceased’s death until the disposal of the ownership interest, the dwelling must have been the main residence of an individual who had a right to occupy it under the deceased’s will.
This condition is particularly relevant where:
- The property is not sold within two years of the deceased’s death, and
- The dwelling is not the main residence of a surviving spouse or the beneficiary who ultimately inherits the property.
What does “right to occupy under the deceased’s will” mean?
According to the ATO’s draft view in Draft Taxation Determination TD 2026/D1, a right to occupy must be expressly granted in the will itself and must be given to a specifically named individual.
The following situations do not satisfy the requirement:
- The right to occupy arises from a separate agreement, such as a deed of arrangement between beneficiaries and the executor or trustee
- The will gives the executor or trustee broad discretion to allow someone to live in the property, and that discretion is later exercised
- The right to occupy is granted under a testamentary trust deed, even if the deed is annexed to the will
- An individual continues to live in the property after a time-limited right to occupy has expired
In short, informal arrangements or post-death decisions are not enough for CGT purposes.
Family provision orders: an important exception
There is one key exception to the general rule.
If a court makes a family provision order granting an individual the right to occupy the dwelling, the ATO will treat that right as if it were granted under the deceased person’s will. In these circumstances, the CGT main residence exemption may still be available.
Time-limited rights to occupy and partial exemptions
If the will grants a right to occupy the property for a limited period only, and the individual continues to live there beyond that period, the full CGT main residence exemption will not apply.
However, depending on the facts, a partial exemption may be available. Accurate records of occupancy dates are critical in determining the CGT outcome.
Why these rules matter
The key takeaway is clear:
If you want a beneficiary to access the main residence CGT exemption when selling an inherited property, the will must explicitly name the occupant and grant them a clear right to occupy.
Discretionary powers, informal agreements, or side arrangements won’t meet the ATO’s requirements.
From a practical perspective, executors should:
- Review the will as early as possible
- Clearly document who occupies the property and why
- Keep detailed records of occupancy periods, vacancies and any rental use
These details often determine whether the CGT exemption is full, partial or unavailable, and can significantly reduce disputes later.
What should you do next?
If you are:
- Administering a deceased estate
- A beneficiary of an inherited property, or
- Reviewing your own estate planning arrangements
now is an ideal time to speak with your tax adviser or estate planning professional about how these rules may apply to your circumstances, particularly in light of the ATO’s draft guidance.