Updated 10 October 2026
Section 118-195 ITAA 1997 fully exempts the sale of a deceased person's former home, or any pre-1985 dwelling, if your ownership interest ends within two years of the date of death. Settlement, not contract, not listing, is what must land inside the window. Miss it and the Commissioner can extend, with an 18-month safe harbour in PCG 2019/5, but only for delays that were genuinely outside the executor's control.
At a glance
- Section 118-195 can fully exempt an inherited main residence sold within two years of death
- The two years run from the date of death to settlement of the sale
- PCG 2019/5 gives a safe harbour extension of up to 18 months where delays were outside your control
- Income-producing use of the home at the deceased's death can break the exemption
- Beyond two years, the gain is measured from the date-of-death market value
In this guide
What the exemption covers
The exemption applies to a dwelling that was either the deceased's main residence just before death and not then being used to produce income, or a property the deceased acquired before 20 September 1985. Sell it, as executor or as beneficiary, with your ownership interest ending within two years of death, and any capital gain or loss is disregarded entirely. The growth between the date of death and settlement simply never enters a tax return.
Two things the exemption does not require: the beneficiary never has to live in the property, and the property can even be rented out after death without destroying the two-year exemption, although income use complicates the fallback position if the sale runs late. The broader cost base rules for estates are covered in our inherited property guide.
The clock: what counts and when it stops
- Start: the date of death. Not probate, not transmission.
- Stop: the end of your ownership interest, which for a standard sale means settlement. A contract signed at month 23 that settles at month 25 misses the window on the letter of the law, which is precisely the fact pattern the safe harbour was written for.
- Two properties can run at once. The deceased's home gets this exemption while the beneficiary's own home keeps its own main residence exemption. The two do not compete.
Warning
Get the date-of-death valuation anywayExecutors planning a within-two-years sale often skip the date-of-death valuation because the gain will be exempt. Then the will is challenged, a beneficiary moves in, the market stalls, or settlement slips, and the exemption turns partial or conditional. Every fallback calculation runs from the market value at death. A $297 date-of-death valuation ordered early is the cheapest hedge in estate administration.
The PCG 2019/5 safe harbour
The Commissioner has a discretion to extend the two years, and PCG 2019/5 tells you when you can apply it to yourself without asking. Under the safe harbour, you can manage your affairs as if an extension of up to 18 months applies, provided the delay was caused by circumstances of the kind the guideline lists, broadly:
- the ownership of the dwelling, or the will, was challenged;
- a life interest or other equitable interest in the will delayed disposal;
- the estate was unusually complex to administer;
- a sale fell through or settlement was unexpectedly delayed for reasons outside your control; or
- restrictions on sales activity applied, of the kind seen during public health orders.
The guideline also expects the practical follow-through: the circumstances took up most of the first two years, the property was listed as soon as practicable once they resolved, and the sale then settled promptly. Keep the paper trail, the probate correspondence, the litigation dates, the listing agreement, because the safe harbour is self-assessed and the evidence is what you stand on if reviewed. Delays longer than the safe harbour, or outside its categories, need a private ruling request to the ATO before you rely on an extension.
What does not qualify for an extension
The guideline is equally clear about the other side. Waiting for the market to improve, renovating to maximise the price, delay from unresolved family disagreement about whether to sell, or simple inattention to the deadline are not circumstances outside your control. An estate that spends year one arguing about whether to keep the house and year two styling it for auction should assume the exemption ends at the two-year mark, and plan the tax position from the date-of-death value accordingly.
Worked example
Note
Worked exampleRobert dies on 10 February 2025. His home, valued at $920,000 at the date of death, passes to his daughter Claire. His other son challenges the will in April 2025 and the dispute settles in June 2026, sixteen months in. Claire lists the property in July 2026, contracts in September 2026 and settles in November 2026, twenty-one months after death. Inside two years: fully exempt, safe harbour never needed.
Now move settlement to June 2027, twenty-eight months after death. The will challenge consumed most of the first two years, the property was listed as soon as practicable after it resolved, and settlement followed promptly. Claire self-assesses within the 18-month safe harbour and the sale at $1,010,000 remains fully exempt. Had the delay instead been two years of family indecision, the exemption would end at February 2027, and the taxable slice would be measured from the $920,000 date-of-death value, which is exactly why that valuation was worth obtaining in 2025.
If the two-year window is missed and the property is sold after 1 July 2027, the taxable gain falls under the capital gains tax changes from that date. Our CGT calculator shows how the reset splits the gain.
Administering an estate?
Date-of-death valuations that anchor the exemption, the fallback and the estate accounts. $297 residential, $595 commercial, incl GST, prepared by a Chartered Accountant and Certified Property Valuer, 24 to 48 hours, Australia-wide.
Start your orderHow it worksLife beyond two years
Where the window and any extension are gone, the position is partial, not lost. The gain from the date-of-death value is apportioned, and occupation by the spouse, a beneficiary, or a person with a right to occupy under the will can extend the exempt period well past two years while they live there. Estates holding property across 1 July 2027 also inherit the reform's deemed disposal, adding a second valuation date that splits the taxable slice between the old and new regimes. The arithmetic in every one of these paths starts from the market value at death, and a backdated valuation can still establish it if the moment has passed.
The day that starts the clock, and the day each other CGT event fixes, are set out in which date is the CGT valuation date.
Common questions
What is the two-year rule for inherited property?
Section 118-195 fully exempts the sale of the deceased's former main residence, or a pre-1985 dwelling, where the ownership interest ends within two years of the date of death. The clock runs from death to settlement, and the beneficiary never needs to live in the property.
Can the two years be extended?
Yes. The Commissioner has a discretion, and PCG 2019/5 provides a self-assessed safe harbour of up to 18 further months where the delay came from listed circumstances such as a will challenge, estate complexity or a collapsed settlement, and the property was sold as soon as practicable once resolved.
Does renting the property after death break the exemption?
Income use after death does not of itself defeat the two-year exemption for the deceased's former home. It does complicate the partial-exemption fallback if settlement lands outside the window, with rented days measured against the date-of-death value.
Is waiting for a better market a valid reason to extend?
No. PCG 2019/5 excludes delays within the executor's control, and holding out for price, renovating for sale, or family indecision are the guideline's own examples of what does not qualify. Plan for the exemption to end at two years in those cases.
