Proposed tax changes are sharpening the focus on inherited property, with implications that real estate agents are likely to feel on the ground.
At the centre of the debate is the ATO’s draft determination TD 2026/D1, which clarifies when an inherited home can retain the capital gains tax (CGT) main residence exemption under section 118-195 of the Income Tax Assessment Act 1997.
Shukri Barbara, founder and consultant at Property Tax Specialists explains that the proposed tax sits within the existing capital gains tax framework.
What remains unchanged
Under long-standing rules, estates can sell a deceased person’s main residence within two years of death without triggering CGT. That position remains intact under the draft.
“If it was the deceased’s main residence and it’s sold within two years, there’s generally no capital gains tax,” Mr Barbara said. “That hasn’t changed.”
Where a surviving spouse continues to live in the property as their main residence, the exemption typically continues.
“If mum and dad own the home and dad passes away, and mum keeps living there, it remains exempt because it is still her main residence,” he said.
Where the pressure point lies
The tightening occurs when a property is retained beyond the two-year window.
Under TD 2026/D1, if the home is held for longer than two years, the main residence exemption will only continue if a beneficiary has an express right to occupy the dwelling under the will and actually lives in the property.
Merely holding the property in a testamentary trust, or allowing a family member to live there informally, may no longer be sufficient.
The draft draws a clearer distinction between a deceased estate and a testamentary trust – a technical difference that carries significant tax consequences.
“A deceased estate arises on death,” Mr Barbara said. “A testamentary trust is created under the will after the estate has been administered. They are legally distinct structures.”
That distinction matters because the exemption depends on whether a beneficiary’s right to occupy is properly established under the will itself, rather than through subsequent trust arrangements.
Informal family situations could create risk.
“Sometimes a daughter has been caring for a parent and continues living in the home after death, but her name isn’t on title and there’s no express right in the will,” Mr Barbara said. “That’s where problems can arise.”
Implications for agents
Tax advisers warn the draft may prompt families to bring forward sales of inherited homes to avoid potential CGT exposure, particularly in high-value markets where properties may have been held for decades.
For agents, this could translate into:
- More time-sensitive estate listings
- Greater urgency around the two-year deadline
- More complex conversations with executors balancing tax exposure against market timing
The safest pathway remains the two-year rule.
“If you’re going to rely on a right to occupy, it needs to be properly documented,” Mr Barbara said. “Plan the will very carefully. This is not an area for informal arrangements.”
The timing of the draft is notable given the scale of intergenerational wealth now transitioning in Australia.
“We’re seeing a major baby boomer transfer of wealth,” he said. “The amount of planning required depends entirely on who the beneficiaries are and how the assets are structured.”
Not a new tax — but a stricter reading
The ATO maintains TD 2026/D1 is a clarification and remains in draft form. However, the determination replaces several long-standing interpretative decisions, signalling a stricter reading of the legislation rather than a continuation of past administrative practice.
For real estate professionals, understanding the mechanics of the two-year rule, the requirement for an express right to occupy, and the limits of testamentary trusts will become increasingly important when advising clients on inherited property sales.
While the fundamentals of the CGT framework remain, the margin for error in estate planning may now be narrower, and that could shape how quickly inherited property comes to market in the years ahead.
