Most people know that if you inherit a person’s home and sell it within two years of their death, it can be exempt from capital gains tax (CGT). However, there is another way to get a full CGT exemption on an inherited home—if a “relevant” person occupies it as their home from the time of the deceased’s death until its later sale (or other transfer or disposal).

These “eligible” persons include the deceased’s surviving spouse, a person given a right to occupy it under the deceased’s will (e.g., a niece, nephew, or friend), or a beneficiary who inherits the home (or an interest in it).

However, there are several factors to consider when using this rule—some beneficial and some not so beneficial:

• It is not necessary to occupy the home immediately after the deceased’s death; as soon as “practicable” will suffice, depending on the circumstances. In the case of a surviving spouse, this would presumably not be an issue.

• The requirement can be met if multiple relevant persons occupy the property successively (e.g., a surviving spouse followed by a beneficiary who inherited the home).

• The exemption applies on an “interest by interest basis,” meaning that if multiple beneficiaries inherit the home, only the beneficiary who occupies it gets an exemption—and only for their share (except in rare cases). However, this issue can be addressed in several ways.

• If a person is given a right to occupy the home under the will, they must be explicitly named or specified; a general power granted to the executor to grant such a right will not suffice—at least according to the ATO’s position.

• For a surviving spouse to qualify for the exemption, they cannot be “living permanently and separately apart from the deceased.” They must have been living with the deceased at the time of death.

Finally, another CGT concession—the “building concession”—may help preserve the CGT-exempt status of the home if renovations are undertaken or intended upon acquisition. This could mean that the home does not have to be occupied by a relevant person (or sold within two years of the deceased’s death) to qualify for the exemption. However, using this concession comes with a significant drawback—no other home can be considered your CGT main residence for the period the concession is applied.

As always, seek our advice if you inherit a home and wish to occupy it—or even beforehand for appropriate planning.