Inherited assets and CGT cost base: what beneficiaries need to know

When an Australian dies, their assets pass to beneficiaries through the estate — but the capital gains tax (CGT) treatment of those inherited assets follows rules that are not intuitive and that materially change what the beneficiary pays when they eventually sell. Under Division 128 of the Income Tax Assessment Act 1997, death is not a CGT event for the deceased: assets transfer to the executor and then to beneficiaries without triggering a capital gain or loss at the moment of death. What happens next depends on three things — whether the deceased acquired the asset before 20 September 1985 (pre-CGT) or on or after that date (post-CGT), whether the asset was the deceased's main residence and how it was being used at death, and what the beneficiary does with it afterwards. For retirees about to inherit from elderly parents, and for those doing their own estate planning, getting these cost-base rules right is the difference between a tax-free transfer and a very large tax bill.

The central principle is that death itself does not trigger CGT. When a person dies their assets are not deemed sold at market value — there is no realisation event and no tax payable simply because ownership passes. The assets go first to the legal personal representative (LPR — the executor or administrator), who holds them during estate administration, then to the beneficiaries (or sells them to fund cash gifts). The CGT event is deferred until the beneficiary, or the LPR, actually disposes of the asset. At that future sale the gain or loss is worked out against a cost base — and which cost base depends on the deceased's history with the asset.

The cost base lands in one of three outcomes, and the original temptation to think "post-CGT always means you inherit the deceased's cost base" misses one of them. First, for pre-CGT assets (acquired by the deceased before 20 September 1985), the beneficiary is taken to acquire the asset at its market value on the date of death — the gain built up over the deceased's lifetime is washed away, and only growth from the death date forward is ever taxed. Second — and this is the commonly missed one — for a dwelling that was the deceased's main residence and was not being used to produce income just before death (where the death was after 20 August 1996), the cost base is also reset to the market value at the date of death, even though the home is a post-CGT asset. Third, for all other post-CGT assets — share portfolios, investment properties, or a home that was being rented at death — the beneficiary inherits the deceased's original cost base (purchase price plus acquisition costs plus capital improvements), and the deceased's latent gain flows straight through. For the discount, the beneficiary's holding period absorbs the deceased's: an inherited post-CGT asset is treated as held since the deceased acquired it, so the 50% CGT discount is generally available on sale.

The main residence exemption on an inherited home is the most generous concession — and the most commonly forfeited. Under section 118-195, a beneficiary can sell the deceased's dwelling completely free of CGT if either the deceased acquired it before 20 September 1985, or it was the deceased's main residence just before death and was not then being used to produce income — provided the beneficiary's ownership ends within two years of the death (it doesn't matter how the beneficiary used the property in the meantime). That two-year window is where families come unstuck: estate disputes, probate delays, or simple indecision let it lapse, turning a fully tax-free sale into a taxable one. The Commissioner can extend the window, and since Practical Compliance Guideline PCG 2019/5 a beneficiary can self-assess a safe-harbour extension of up to 18 months (taking it to about 3.5 years) where the delay was caused by circumstances outside their control — a contested will, a challenge to the estate, or a settlement that fell through — without applying to the ATO; longer extensions need a private ruling.

The "used to produce income at death" trap is the single most important — and most counter-intuitive — point for families whose parent moves into aged care. The full exemption (and the market-value cost-base reset) hinges on the home not being used to produce income just before death. A home left vacant during aged care keeps that status: the deceased can choose, under the absence rule in section 118-145, to keep treating it as their main residence, and because it isn't earning income, the full exemption survives. But a home rented out right up to the date of death fails the income test — the absence rule preserves the "main residence" label but cannot undo the fact that the property was earning income at death. In that case the full exemption is lost and only a partial exemption is available, with the taxable portion worked out by apportioning the gain over the days the dwelling was not the main residence. Whether the home is vacant or tenanted at the moment of death can be worth hundreds of thousands of dollars to the beneficiaries.

The legal personal representative stage also matters. While the executor holds the assets, no CGT is triggered — they pass through on the same rollover basis. But if the LPR sells an asset during administration (to raise cash or dispose of something no beneficiary wants), that sale is a CGT event for the estate, worked out against the same cost base the beneficiary would have used. Where a beneficiary can instead take an asset in specie — receive the shares or property directly rather than have the executor sell — the rollover continues and tax stays deferred until the beneficiary chooses to sell. For high-value assets sitting on large latent gains, taking the asset rather than the cash can be a meaningful timing lever.

What do worked planning examples show?

These two cases show how the inherited CGT rules apply in practice. Illustrative only — not personal advice — using FY25-26 rules.

Case 1 — Joan, 71, inherited her late mother's suburban Melbourne home eight months ago. Her mother bought it in 1988 for $180,000, lived in it as her main residence until she moved into residential aged care 18 months before death, and rented it out for that whole 18-month period — so it was tenanted at the date of death. It is now worth about $1.4M. This is exactly the trap. Because the home was being used to produce income just before death, the section 118-195 full exemption is not available, even though Joan has roughly 16 months of the two-year window left — and the market-value-at-death cost-base reset doesn't apply either. Joan instead inherits her mother's cost base (the $180,000 plus any capital improvements), and only a partial exemption applies, with the gain apportioned over the period the home was income-producing. The "home first used to produce income" rule may reset the cost base to the home's market value when it was first rented, which would shrink the taxable gain considerably, but the calculation is technical. On these facts the rational step is to get specialist CGT advice on the partial-exemption sum before selling — and the broader lesson for families is stark: had the home been left vacant during aged care rather than rented, the full exemption (and a clean market-value cost base) would have been preserved.

Case 2 — Robert, 68, inherited his late father's share portfolio six months ago. His father built it between 1976 and 1990: about $150,000 of the original cost was spent on parcels bought before 20 September 1985 (pre-CGT), and about $80,000 on parcels bought after that date (post-CGT). The portfolio is now worth about $400,000. Here the treatment splits by parcel. The pre-CGT parcels pass to Robert at their market value on the date of death — say roughly $240,000 of the current value — so a later sale is taxed only on growth from the death date forward. The post-CGT parcels carry the father's original cost base of about $80,000; if those are now worth around $160,000, selling them realises an $80,000 gain, taxed at Robert's marginal rate with the 50% CGT discount (his holding period includes his father's, so the discount is available). On these facts, if Robert needs cash it is generally cleaner to sell the pre-CGT parcels first, where the gain is smallest, and to spread the post-CGT sales across financial years to manage his marginal rate — potentially pairing a sale year with a personal deductible super contribution to offset some of the gain.

For retirees facing inheritance — as beneficiaries or as future testators — these cost-base rules are foundational. The advice work is to sort the deceased's assets into pre-CGT, post-CGT main residence (not income-producing at death), and other post-CGT; to check the main residence's income history with real care; to calculate the latent gains that flow through; and to act inside the two-year window. For your own estate planning, the rules quietly favour holding pre-CGT assets and the family home (kept out of income production near the end of life), and they reward telling your executor and beneficiaries the cost-base history so the eventual sale is informed rather than blind.

Sources

• Australian Taxation Office (ATO) — Inherited property and cgt
• Australian Taxation Office (ATO) — Cost base of inherited assets
• Australian Taxation Office (ATO) — Extensions to the 2 year ownership period
• Australian Taxation Office (ATO) — Calculating a partial exemption for inherited property
• Australian Taxation Office (ATO) — Print