Inheriting a property can be life-changing - or a missed opportunity

Australia is witnessing a monumental intergenerational wealth transfer, with Baby Boomers (born 1946–1964) set to pass on $3.5 trillion to $5.4 trillion in assets by 2050, according to the Australian Productivity Commission.

Property, the cornerstone of this wealth, accounts for more than 60 per cent of inheritances, followed by superannuation. While the average inheritance is $125,000, typically received by those in their fifties, the uneven distribution means some will inherit life-changing sums, while others receive little.

For property investors, understanding the tax implications—particularly capital gains tax (CGT)—is crucial to maximising these windfalls. Here’s what you need to know about inheriting property in 2025.

The scale of wealth transfer

The Productivity Commission’s report and other research highlights that residential real estate dominates inheritances, reflecting Australia’s property obsession.

With median house prices hitting $1.1 million in major cities, inherited homes can significantly boost wealth, however, tax obligations, especially CGT, can erode these gains if not managed carefully.

Unlike countries with inheritance or estate taxes, Australia imposes no such levies, but the Australian Taxation Office (ATO) still looms large, particularly for properties sold post-inheritance.

Capital gains tax: the key consideration

If the inherited property was originally acquired by the deceased before 20 September 1985 (pre-CGT), or the property was the deceased person’s main residence just before they died, the market value at the date of death becomes the cost base for CGT purposes. Otherwise, the original purchase date and cost base of the property are retained.

Celina Chan, Senior Tax Manager, Australasian Taxation Services, said CGT is triggered upon the sale of the inherited property and is calculated as the difference between the sale price and the cost base—typically the deceased’s original purchase price, adjusted for associated costs such as stamp duty, or the market value at the date of death if applicable.

“Australian residents may be eligible for a 50 per cent CGT discount if the property is held for more than 12 months,” Ms Chan said.

The resulting capital gain is taxed at the individual’s marginal tax rate, which ranges from 16 per cent to 45 per cent for the 2024–25 financial year.

“Non-residents face the full gain, with no discount, and a 15 per cent Foreign Resident Capital Gains Withholding (FRCGW) rate applies on sales since 1 January 2025,” Ms Chan added.

The most significant relief is the full CGT exemption for the deceased’s main residence, provided it’s sold within two years of death.

“This period can be extended by the ATO Commissioner or self-assessed under guidelines (e.g., delays due to legal disputes or market conditions),” Ms Chan noted.

“Alternatively, a full exemption applies if a “specified person” (e.g., surviving spouse, beneficiary, or someone with a right to occupy) lives in the home from the deceased’s death until sale, and it was the deceased’s main residence at death or deemed so under the absence concession (e.g., if they were temporarily absent but intended to return).”

Partial exemptions and complex calculations

If neither full exemption applies, a partial CGT exemption is calculated pro-rata, based on the time the property was not the main residence of the deceased or a specified person, both before and after death.

For example, if a property was rented out for five of 15 years owned, one-third of the gain may be taxable. The cost base can include non-deductible holding costs (e.g., interest, rates) from periods when the property wasn’t income-producing, reducing the taxable gain.

Complexities arise with concessions and traps. For instance, the ATO allows certain periods (e.g., up to six years of absence) to be treated as main residence use, but if the deceased was an “excluded foreign resident” (non-resident at death), these concessions are limited, potentially increasing the taxable gain. Missteps can mean the difference between a $100,000 or $1 million taxable gain, especially for high-value properties.

Case study: maximising exemptions

Consider a Sydney couple who inherited a $1.2 million home from a parent in 2024.

The property, purchased for $600,000, was the parent’s main residence. The market value at the date of death was $800,000.

By selling within two years, they claimed a full CGT exemption, saving $74,000 (assuming a 37 per cent tax rate on the $200,000 discounted gain).

Had they rented it out for three years before selling, a partial exemption would have applied and market value at the date of death would be used to calculate the capital gain.

Strategic timing was key.

Estate planning: securing your legacy

Property and superannuation dominate inheritances, making estate planning vital.

A valid will ensures assets are distributed as intended, while binding death benefit nominations for super funds prevent disputes.

“Without a will, intestacy laws may dictate distribution, potentially increasing tax liabilities,” Ms Chan said.

“For non-residents, Australia’s Double Taxation Agreements (e.g., with the UK, US) can mitigate double taxation on inherited property income, but professional advice is essential.”

Practical steps for investors

Given the complexity around inheritance, consulting a tax adviser or estate planner is critical.

Professionals can clarify CGT exemptions, calculate cost bases, and navigate traps like foreign resident status.

Keeping detailed records of holding costs and occupancy history is crucial for maximising exemptions. For 2025, staying informed about ATO updates, like FRCGW changes, ensures compliance and optimises returns.

Inheriting property in Australia offers immense opportunities but demands careful tax planning. With the right strategy, investors can turn a windfall into lasting wealth.