The ATO has issued Draft Taxation Determination TD 2026/D1, which looks at how inherited family homes are treated for capital gains tax (CGT) purposes.
Some commentators have described it as a “death tax by stealth”, although the issue is more nuanced than that. The draft guidance focuses on one specific part of the rules for applying the main residence exemption to inherited properties. If not planned properly, it could leave deceased estates and beneficiaries exposed to significant tax.
Here’s what it means in practical terms.
Why TD 2026/D1 matters
Under the current rules, a deceased estate or beneficiary may be able to sell a deceased person’s former family home without paying CGT if certain conditions are met. This exemption can be especially valuable where a property has been held for many years and has built up a large unrealised capital gain.
To access a full exemption, you generally need to ensure one of the following applies:
- the property is sold within two years of the date of death (although the ATO may allow more time in some cases), or
- from the date of death until the sale, the property is the main residence of a qualifying individual
These qualifying individuals can include:
- the deceased person’s surviving spouse
- the beneficiary selling their interest in the property
- a person who has a right to occupy the dwelling under the deceased’s will
What the draft guidance is focusing on
The draft determination focuses on that last category, a person who has a right to occupy the dwelling under the will.
The ATO’s view is that:
- the right to live in the home must be expressly granted in the will
- the right must be given to a specific named individual
- broad discretionary powers given to executors or trustees are not enough
- separate agreements made outside the will are not enough
- occupation through a testamentary trust may also not satisfy the rule in the ATO’s view
Examples of where problems can arise
Under the ATO’s draft view:
- a will that gives an executor discretion to let a family member live in the property may not satisfy the requirement
- where a trustee of a testamentary trust allows a beneficiary to live in the home, that arrangement may be treated as separate from the will, which could lead to CGT on sale
Some legal and property experts have warned that this interpretation could push families to sell inherited homes within two years of death to avoid CGT, especially in high-value areas.
Why this can matter financially
The amounts involved can be significant.
For example:
- if a family inherits a $2 million home
- and the capital gain is $1.5 million
- the eventual tax exposure could be somewhere in the range of $300,000 to $600,000, depending on available discounts and the beneficiaries’ tax positions
That said, there may still be other ways for a sale to qualify for a full exemption. The outcome will depend on the facts and on how the estate has been structured.
Practical steps to help protect your estate
While the ATO’s guidance is still in draft form, there are some sensible steps families can take now:
- Review and update your will
If you want someone to have the right to live in a property after your death, check whether the will gives that right clearly and to a specifically named person. - Plan the timing of any sale
The two-year exemption window remains important. If a property may be held for longer than that, it is worth weighing any CGT exposure against rental income, family needs and market conditions. - Get professional advice early
This is especially important where the estate plan involves testamentary trusts or more complex family arrangements. Tax and legal advice should work together. - Take market conditions into account
A quick sale may help preserve a CGT exemption, although tax should not be the only factor driving the decision.
The key takeaway
Estate planning needs to be handled carefully. Small details in a will can have major tax consequences later. For families hoping to preserve wealth across generations, this draft ATO view is a reminder that inherited property arrangements should be reviewed early and structured with care.
If you have questions or concerns, please do not hesitate to contact our office to speak to one of our team.
