In short

Under s.118-195 of ITAA 1997, an inherited dwelling sold within 2 years of the deceased's death is generally exempt from capital gains tax regardless of how it was used in the meantime. PCG 2019/5 lets executors self-assess an extension to 3.5 years for qualifying delays, and beyond that a Commissioner's extension can apply. Missing the deadline without an extension can trigger substantial CGT, especially for post-1985 properties.

When an Australian taxpayer dies and their main residence passes to a beneficiary or to the legal personal representative (LPR) of the estate, the CGT main residence exemption that applied to the deceased can flow through to preserve tax-free disposal of the dwelling — but only within specific conditions and time limits set out in section 118-195 of the Income Tax Assessment Act 1997 (https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.195.html, accessed 10 May 2026). The principal rule is the 2-year window: where your ownership interest in the inherited dwelling ends within 2 years of the deceased's death, the capital gain on disposal is generally fully exempt from CGT regardless of how the property was used during the 2-year period (vacant, rented out, family occupation). Where the dwelling is sold after 2 years without a Commissioner's extension, the exemption may be partially or wholly lost depending on the use during the post-2-year period and the specific qualifying conditions in s.118-195(1) (ATO — inherited property and CGT, https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/property-and-capital-gains-tax/inherited-property-and-cgt, accessed 10 May 2026). For families managing the deceased's home — a near-universal experience for adult children of elderly parents — the 2-year rule sets a meaningful planning deadline that should be flagged and respected from the date of death.

The 2-year window runs from the date of death to the day your ownership interest in the dwelling ends — generally the date of settlement when legal title transfers to the buyer. (The CGT event A1 itself happens at contract date under s.104-10, which determines the financial year the gain falls into; but for the purposes of the s.118-195 2-year exemption, the measurement is the day the ownership interest ends, which is normally settlement.) A dwelling whose owner died on 1 January 2024 needs settlement to occur on or before 1 January 2026 to fall within the standard exemption. The window is generous in concept but can become tight in practice when probate is delayed, when family members can't agree on disposition, when the property requires substantial repairs before marketing, or when market conditions discourage early sale. The practical implication is that estate administration should proceed promptly — applying for probate, preparing the property, and engaging the market — rather than letting the 2-year window quietly expire.

The Commissioner has a discretion to extend the 2-year window where circumstances make sale within 2 years impractical. The ATO has published Practical Compliance Guideline PCG 2019/5 (https://www.ato.gov.au/law/view/document?docid=COG/PCG20195/NAT/ATO/00001, accessed 10 May 2026) setting out a safe harbour for self-assessing an extension of up to 18 months beyond the original 2-year window — to a total of three and a half years from death — where qualifying circumstances are present. The PCG identifies five qualifying circumstance categories: ownership of the dwelling or the will being challenged; a life or right to occupy granted to a person under the will; complexity of the deceased estate delaying the completion of administration; settlement of the contract being delayed or falling through for reasons outside the LPR's or beneficiary's control; or restrictions on the dwelling's sale due to unforeseen circumstances. Where the qualifying circumstances apply for at least 12 months of the period beyond the original 2-year window and the property is sold within the safe harbour timeframe, no extension application is required. For circumstances outside the safe harbour, a formal extension application can be made to the Commissioner, with case-by-case discretion exercised based on the specific facts. The discretion is generally exercised reasonably where the extension request is genuine and well-documented; it isn't a back-up for executors who simply chose not to act promptly.

The use of the dwelling during the 2-year period doesn't affect the exemption under the standard 2-year rule. The dwelling can be vacant (the most common scenario), occupied by the deceased's spouse or other family member, or rented out to third parties — provided the disposal occurs within 2 years (or extended period). So an estate that rents the dwelling for 18 months while waiting for the right market conditions, then sells at month 22, has a fully exempt sale. The flexibility is useful for executors managing complex estate timelines, balancing family needs (for example the deceased's spouse wanting to remain in the home for some time before downsizing), market timing considerations, and practical administration steps.

For sales after 2 years without a Commissioner's extension or PCG safe harbour, the CGT treatment depends on the use during the post-2-year period under s.118-195(1)(b)(ii). Where the dwelling continues to be the main residence of the deceased's spouse, of a person with a right under the deceased's will to occupy the dwelling, or of an individual to whom the dwelling passed as a beneficiary under the will, the exemption may continue to apply for that period. Where the dwelling has been used in non-qualifying ways (rented to unrelated parties, held vacant as an investment), the gain is calculated under the partial exemption rules in s.118-200, with the capital gain or loss apportioned based on the proportion of days that the dwelling was used in non-qualifying ways during the LPR's or beneficiary's ownership period. For estates where the home is sold years after death without specific qualifying use, the CGT cost can be substantial, particularly for post-CGT acquired properties where the cost base is the deceased's original cost base.

The pre-CGT versus post-CGT distinction substantially affects the financial cost of missing the 2-year window. Under section 128-15 of the ITAA 1997 (https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s128.15.html, accessed 10 May 2026), for dwellings acquired by the deceased before 20 September 1985 (pre-CGT), the cost base for the beneficiary or LPR is generally the market value at date of death. This produces a substantial cost base reset that often eliminates most of the historical capital gain — a property bought in 1975 for $50,000 worth $1.5 million at the deceased's death has a cost base of $1.5 million in the beneficiary's hands, with a sale three years later at $1.6 million producing only a $100,000 gain (subject to the CGT discount where applicable). For dwellings acquired by the deceased after 19 September 1985 (post-CGT), the cost base for the beneficiary is the deceased's cost base — the original purchase price plus capital additions and certain incidental costs over the years. A property bought in 1990 for $200,000 worth $2 million at the deceased's death produces a $1.8 million capital gain on sale outside the 2-year window without exemption — a substantial CGT bill (subject to the 50% discount for individuals after 12 months ownership and any applicable s.118-200 apportionment).

A specific complication arises where the deceased was not occupying the dwelling at death — typically when the deceased had moved into aged care or had been living with family for years before death. The 2-year exemption depends on the dwelling having been the deceased's main residence and not being used for income-producing purposes at the time of death, or having continued to be treated as main residence under the 6-year absence rule in section 118-145 (https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.145.html, accessed 10 May 2026). The absence rule allows a taxpayer to continue to treat a former home as main residence for up to six years if it is rented out (no time limit if it is not rented out), and the s.118-195 inheritance flow-through tests track that election. For aged-care-affected estates, the analysis is fact-specific: the deceased may have continued to treat the home as main residence under the absence rule (preserving the exemption); they may have lost main residence status by exceeding the six-year rented absence; or they may have had a period of qualifying absence with adjustments. For complex aged-care-affected estates, specialist tax advice is appropriate to determine whether the s.118-195 flow-through applies in full.

The practical estate timeline typically allows for the 2-year window to be respected with reasonable administration. From date of death, the LPR applies for probate (typically one to three months from application to grant), prepares the property for sale (clearing contents, addressing repairs, one to three months), conducts a marketing campaign (four to eight weeks typically), and completes settlement (30–60 days typically). The total timeline from death to settlement is generally six to twelve months for an organised estate — well within the 2-year window. Where complications arise (contested probate, family disputes about retaining versus selling, properties needing significant remediation, soft market conditions), the timeline can extend, and the PCG 2019/5 safe harbour or a formal extension application provides flexibility for genuine cases.

For executor-beneficiaries who plan to retain the property rather than sell, the CGT treatment shifts. If they move in and treat the dwelling as their own main residence, their own main residence exemption applies going forward (with cost base reset at acquisition under the s.128-15 inheritance rules — market value for pre-CGT properties, deceased's cost base for post-CGT properties). If they retain the property as an investment (renting to tenants), the dwelling becomes an investment property in their hands, with cost base being the deceased's cost base (post-CGT) or market value at death (pre-CGT). For executor-beneficiaries planning retention, the CGT consequences should be modelled carefully — the inheritance situation is the moment of cost base determination, and decisions made now affect tax outcomes for the rest of the property's holding period.

The practical advice work for clients managing inherited dwellings has a specific shape. Identify the date of death and start the 2-year clock immediately. Confirm the deceased's main residence status at death (occupied, on the absence-rule election, etc.). Determine whether the property was acquired pre- or post-CGT by the deceased. Plan the sale settlement within the 2-year window where straight sale is the goal. Consider the PCG 2019/5 safe harbour or a Commissioner's extension where circumstances warrant. Coordinate with beneficiaries on retention versus sale decisions before the window closes. Document the timeline for tax compliance. Engage tax specialist advice for complex aged-care-affected or pre-CGT cases. The work is administrative more than strategic for most estates — the rules are clear, the timeline is generous, and the family's principal task is execution within the window.

What do worked planning examples show?

These two cases show how the 2-year rule plays out for typical estate scenarios. Illustrative only — not personal advice — using FY25-26 figures.

Case 1 — Robert's father died on 1 March 2024, leaving the family home valued at $1.4 million (purchased in 1995 for $300,000 — post-CGT). Robert is the executor and sole beneficiary. On these facts, the rational pathway is straightforward: probate process during 2024, market the property in late 2024 or early 2025, sell with settlement well within the 2-year window (by 1 March 2026). At settlement within the window, the gain is fully exempt under the s.118-195 flow-through — no CGT. The trap to avoid is letting the property sit beyond 1 March 2026 without falling within the PCG 2019/5 safe harbour or obtaining a Commissioner's extension. If sold at, say, 30 months after death without any extension and without the dwelling being a qualifying main residence in the post-2-year period, the gain (calculated using the deceased's $300,000 cost base under s.128-15) would be substantial — potentially over $1 million before the 50% CGT discount. The 2-year deadline is the critical planning anchor.

Case 2 — Margaret's mother died on 1 June 2024 leaving a home valued at $900,000 (purchased in 1972 for $30,000 — pre-CGT). Margaret is the sole beneficiary. She wants to keep the home for sentimental reasons but isn't sure about timing. On these facts, the analysis differs. Pre-CGT property has cost base reset to market value at death ($900,000) under s.128-15. If Margaret moves into the home and treats it as her main residence, future capital gains are protected by her own main residence exemption. If she retains as an investment property and rents to tenants, the cost base is $900,000 — much higher than the deceased's $30,000 — providing favourable CGT treatment on subsequent sale. If she sells with settlement within the 2-year window (by 1 June 2026), the sale is exempt under flow-through. If she sells after 2 years without occupying as main residence, the gain calculated against the $900,000 cost base is modest given typical post-death market movements. The pre-CGT status materially reduces the cost of missing the 2-year deadline. The trap to avoid is assuming the rules are the same as her friends' post-CGT inheritances — they aren't, and the pre-CGT cost base reset gives her more flexibility.

For estate executors and beneficiaries managing inherited dwellings, the CGT 2-year rule under s.118-195 is the structural deadline that determines whether the deceased's main residence exemption flows through to a tax-free sale. The rule is generous in concept (24 months is typically ample for an organised estate), with PCG 2019/5 self-assessed extension to 3.5 years for qualifying circumstances, and the Commissioner's discretion available for genuine delays beyond that. The practical advice work is to flag the deadline early, plan the estate administration to fit within the window, and apply specialist advice for complex cases. For most families, the standard pathway is straightforward — settle within 2 years and the gain is exempt. For families managing complex estates, aged-care-affected deceased histories, or pre-CGT properties, the analysis requires more care but the framework provides clear answers.

Sources

Key takeaways

  • If an inherited dwelling's ownership interest ends (generally at settlement) within 2 years of the deceased's death, the sale is generally fully exempt from CGT regardless of whether the property was vacant, rented, or occupied by family during that period.
  • PCG 2019/5 provides a safe harbour letting executors self-assess an extension of up to 18 months beyond the standard 2-year window, to a total of 3.5 years from death, for five defined categories of qualifying delay, without needing a formal application.
  • Whether the deceased acquired the property before or after 20 September 1985 has a major impact on CGT if the 2-year window is missed: pre-CGT properties get a cost base reset to market value at death, while post-CGT properties inherit the deceased's original cost base.
  • Where the deceased wasn't living in the home at death — often because they'd moved into aged care — the exemption depends on whether the home still qualified as their main residence under the 6-year absence rule at the time of death.
  • An organised estate typically settles a property sale within 6 to 12 months of death, well inside the standard 2-year window, making the deadline a manageable administrative target for most families rather than a strategic constraint.

Frequently asked questions

How long do I have to sell an inherited home tax-free after someone dies?

Generally 2 years from the date of death. If your ownership interest in the dwelling ends (usually at settlement) within that window, the sale is exempt from capital gains tax under s.118-195 of ITAA 1997, regardless of whether the property sat vacant, was rented out, or was occupied by family during that time.

What happens if I can't sell an inherited property within 2 years?

The ATO's Practical Compliance Guideline PCG 2019/5 lets you self-assess an extension of up to 18 months (to 3.5 years total from death) if a qualifying circumstance applies for at least 12 months of the extra period — such as a contested will, a life interest granted under the will, or a delayed settlement outside your control. Beyond that, you can apply to the Commissioner for a further extension based on the specific facts.

Does it matter if the property was bought before or after 1985 for CGT purposes?

Yes, significantly, if the 2-year window is missed. For properties the deceased acquired before 20 September 1985, the cost base resets to market value at the date of death, which often eliminates most of the historical gain. For properties acquired after that date, the beneficiary inherits the deceased's original cost base, which can produce a much larger taxable gain.

Can I move into an inherited home to avoid capital gains tax?

If you move in and treat it as your own main residence, your own main residence exemption applies to gains from that point forward, with the cost base set under the same pre/post-1985 rules. If you instead keep it as a rental investment, it becomes an investment property in your hands with the deceased's cost base (or market value at death for pre-1985 properties), affecting the CGT calculation on a later sale.

A note on advice. This article is general information only and doesn't account for your personal circumstances. Everyone's situation is different — before acting, it's worth talking it through with a licensed adviser who knows your full picture.