Have you inherited a property from a deceased estate and wondered whether you’ll be eligible for the main residence capital gains tax (CGT) exemption when you eventually sell it? A new draft tax determination from the ATO clarifies what it means to have a “right to occupy” a dwelling under a deceased person’s will and explains when beneficiaries and trustees of deceased estates can access the CGT main residence exemption. Draft Taxation Determination TD 2026/D1 is open for public comment during February 2026, so there may be changes before it’s finalised, but it aims to provide certainty for taxpayers, executors and those preparing wills.
The main residence exemption for inherited properties
Generally, if you inherit a property from a deceased estate, you may be able to disregard a capital gain or capital loss when you sell it, if certain conditions are met. One of the potential conditions (among other alternatives) is that from the date of the deceased’s death until you dispose of your ownership interest in an inherited property, the dwelling must have been the main residence of an individual who had a “right to occupy it under the deceased’s will”. This rule is particularly important if the dwelling isn’t sold within two years of the deceased person’s death and it’s not the main residence of a surviving spouse or the beneficiary of the dwelling.
What does “right to occupy under the deceased’s will” actually mean?
The ATO’s position is that the right to occupy must be expressly granted in the terms of the will itself to a specifically named individual. The following situations won’t satisfy the requirement: where the right to occupy arises from a separate agreement between beneficiaries and the executor or trustee, such as a deed of arrangement; where the executor or trustee has broad discretion under the will to grant a right to occupy to any individual, and exercises that discretion in favour of someone; where the right to occupy is granted under a testamentary trust deed, even if that deed is annexed to the will; where an individual continues to occupy the property after a specified period granted in the will has expired.
What about court orders?
There is one important exception: if a family provision order is made by a court granting a right to occupy, this will be treated as if the right was granted under the deceased person’s will.
Time-limited rights to occupy
If the will grants a right to occupy for only a limited period and the individual continues to occupy the property beyond that time, the full CGT main residence exemption will not be available. However, a partial exemption may apply.
Why does this matter?
The key takeaway is that if you want a beneficiary to be able to access the main residence exemption when they eventually sell an inherited property, the will must specifically name the person who resides in the dwelling after the deceased person’s death and grant them an express right to occupy. Informal arrangements or discretionary powers won’t be sufficient. Practically, this means executors should review the will early, document who lives in the home and why, and keep clear records of dates of occupancy and any periods when the property is rented. Those facts often determine whether the exemption is full, partial or unavailable, and can save disputes later significantly.
What should you do?
If you’re involved in administering a deceased estate, are a beneficiary of one, or are currently reviewing your own estate planning arrangements, it’s an excellent time to speak with your tax adviser about how these rules may apply to your specific circumstances.