The Two-Year Rule for Selling Deceased Estate Property in Australia

Selling an estate property without incurring tax liabilities is possible under certain conditions, particularly through the application of the main residence exemption for CGT and other specific exemptions. Key considerations include the ownership period, the use of the property as a main residence, the residency status of the seller, and the nature of the property as taxable Australian property.

The Australian tax system provides significant CGT exemptions for deceased estates, particularly through the main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (Cth). To qualify, the property must have been the deceased’s main residence and not used to produce income. Beneficiaries must dispose of the property within two years of the deceased’s death, although extensions may be granted in certain circumstances.

The two-year rule

The two-year rule is available where:

• The dwelling was the deceased person’s main residence just before their death and was not being used to produce income (for example, it was not rented out) at that time; or
• The dwelling was acquired by the deceased before 20 September 1985 (a pre-CGT asset).

Extending the Two-Year Period

The Commissioner of Taxation has discretion to extend the two-year period. You can self-assess an extension of up to an additional 18 months (taking the total period to three and a half years) without applying to the ATO if all of the following conditions are met:

• During the first two years after death, more than 12 months was spent dealing with one or more of these circumstances:

• Ownership of the dwelling or the will was challenged
• A life interest or other equitable interest under the will delayed disposal
• The complexity of the estate delayed administration
• Settlement of a sale contract was delayed or fell through for reasons outside your control

• The dwelling was listed for sale as soon as practically possible after those circumstances were resolved, and the sale was actively managed
• Settlement occurred within 12 months of the property being listed for sale
• The total extension sought is no more than 18 months

If the above conditions are not met, a formal request can still be made for the Commissioner to exercise discretion. Delays caused by factors outside the executor’s or beneficiary’s control (such as will disputes or genuine administration difficulties) are more likely to be accepted than delays due to inactivity or convenience.

CGT Rollover

Division 128 of the Income Tax Assessment Act 1997 (Cth) allows for a CGT rollover when assets pass from a deceased estate to a beneficiary. The beneficiary inherits the asset with either the deceased’s cost base (for post-CGT assets) or the market value at the date of death (for pre-CGT assets). CGT event K3 applies to distributions of CGT assets to non-residents or tax-advantaged entities, triggering immediate CGT liability.

Foreign residents are generally excluded from claiming the main residence exemption unless the property qualifies as taxable Australian property Main residence exemption.